Donors, NGOs, Social Enterprises: Share your ideas on how an Indian Social Stock Exchange should be!
Updated: Jul 25, 2020
We come to you this time to seek your insights on a game-changing government proposal to launch a Social Stock Exchange as part of SEBI.
So, what do you think a good Indian Social Stock Exchange (SSE) should look like? Will it and how will it help you as a donor to NGOs, an investor in For-Profit Social Enterprises (FPSE), or as an NGO/FPSE yourself? (Pls take a 5-min survey on these. Link is near the bottom of this blog)
SEBI has proposed an Indian SSE, which, you may know, will create a stock exchange ,where Not-for-profit Organisations (NGOs in common parlance) and For-Profit Social Enterprises (businesses with social impact) can list for raising funding. The benefits are obvious and good: more and better funding, transparency of operations and social-impact, and accountability of NGOs and FPSEs.
A few countries have tried SSEs, but all have struggled. UK Social Stock Exchange (“SSX”), started in 2013, did not manage to become a trading platform, and is now only a directory of FPSEs and is widely considered to have failed. Canada Social Exchange (CVX) in 2013 is also NOT a true exchange, is insignificant, and only connects FPSEs with investors. Brazil’s SSE is the oldest having started in 2003, and is still insignificant. South Africa and Kenya have also tried and are marginal operations. Mauritius Stock Exchange and a private FPSE in Singapore run probably the largest of all these (IIX) but it aims to run like the UK SSX (again not an exchange in true sense), mainly again for FPSEs and its Women Bond is listed on the main Singapore Exchange. So, unfortunately, there are no really successful models, we can emulate and therefore a lot of unavoidably untested (albeit admirable) ideas in the Indian SSE Report. SEBI has acknowledged that.
We, therefore, must learn from the errors of the above efforts and design it correctly from the very beginning, else we may end up killing a good idea. SEBI's SSE working group’s Report is an excellent start to this thought and SEBI has, therefore, asked us all for our comments on this Report. We had, therefore, reviewed this Report and had sent our feedback, based on our NGO and our FPSE experiences. This deadline is now extended to 15Aug20, so we urge you; the donors, the investors, the NGOs and FPSEs, to send your feedback to SEBI.
Here are the questions, we think, we need to consider (explained with our recommendations in our above mentioned feedback letter):
1. Shouldn’t there be a key SSE design principle enshrined that SSE be run like an NGO/FPSE and its governance and accountability standards higher than the conventional stock exchange?
2. As the SSE Report does not define FPSEs (defining FPSE is admittedly very difficult and that is one reason for lack of credibility in some of other countries' SSEs), should SSE not standardize at least a few ethical ‘tests’ that an FPSE must pass before listing? Perhaps there should be an ‘Admissions Panel’, with independent credible members, equally from the NPO and PFE worlds, to approve both NGOs/FPSEs and institutional investors to avoid imposter organisations from listing or investing.
3. Should NGOs and FPSEs be on different platforms? Here are at least two reasons. One, principled NGOs focus only on social impact and have no consideration for profits; they need donations to help beneficiaries. All FPSEs, on the other hand, have to sell goods/services and make profits, which brings with it the usual business pressures and as mentioned above, they are very difficult to define. These two, therefore, have very different value orientations. FPSEs can suffer much more from mission-drift in pursuit of profits. Some of the largest Foundations in India fund only NGO and not FPSEs for this reason. Being on the same platform can mix-up the two, providing the "halo effect" of principled NGOs to even imposter FPSEs, to the detriment of beneficiaries and donors. Two, FPSEs can afford to recruit (many more) consultants from their profits for their sales pitches, and dominate the platform. Most platforms worldwide do not have NGOs on them at all or in any significant way, probably for these reasons.
4. Should tax incentives for profit-making FPSEs ever be equal or more attractive than donations to NGOs? NGOs do things like feed hungry migrant workers during the COVID19 crisis, without expecting to sell anything, something FPSEs are unlikely to do, as they need to make profits.
5. Should tax incentives to NGOs on SSE be any more than those who do NOT list on SSE?
That may create a class system dis-advantaging the smaller, less SSE-friendly NPOs, who still make immense positive impact in their communities. NGOs, by definition, are needed only because and where governments and/or markets fail.
6. Should the SSE Working group have representation from the NGO world? Currently there are none.
7. Shouldn’t FPSEs be regulated if they get tax incentives? Please remember that NGOs are highly regulated by Income Tax Office, Ministry of Corporate Affairs, etc. and such regulations are being made tighter. In the UK, FPSEs are lightly regulated, but then they get no tax incentives.
8. Should FPSEs/NGOs be asked to declare, apart from direct and indirect ownership structure, salaries/compensations of owners, directors and senior employees, and any ‘declaration of interest’ with its counter-parties? This is important we think to avoid listing of imposter NGOs and FPSEs.
9. Shouldn’t the proposed Rs 100 crore fund to develop SSE be divided specifically for direct cost support in the NGOs? We think that will avoid this fund being disbursed mostly to ecosystem intermediaries like impact-auditors, lawyers, asset managers, etc for mostly FPSEs?
10. Would you not like to know typical expected cost of using SSE for raising funds and therefore minimum transaction-size to evaluate this proposal and its use for you?
11. Should there be not an a social-impact matrix for SSE? Just as SSE requires NGOs/FPSEs to report robustly on their impact, we think SSE should too to prove that their design assumptions worked out eg. evidence of increase in philanthropy in India as a result of SSE, inclusion of senior and junior credible staff from social sector to make SSE work with social values, etc.
Should you be interested in more questions and our recommendations for these questions, here, again, is our letter to SEBI with all these.
If this provokes any thoughts, could you please complete this 5-minute survey, which will help us aggregate your views and provide to SEBI, by 5th August 2020.
And, yes, apart from thinking about SSE in the past few days, we continued accelerating our other work regarding compensations for injured workers from ESIC, Safety in auto-sector supply chain, distribution of masks, etc. More on that in the next blog. Stay Safe. Work Safe.
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