India is considering a novel way for its social enterprises and voluntary organisations to raise funds.

Presenting the union budget on July 5, finance minister Nirmala Sitharaman proposed to set up a “social stock exchange,” under the markets regulator Securities and Exchange Board of India (Sebi), where shares of commercial businesses that do social work would be listed and traded.

“It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion,” said Sitharaman.

Industry watchers have welcomed the government’s intent.

“Access to, and availability of, funds is one of the biggest problems for social enterprises and non-governmental organisations (NGOs). Currently, there is only a small crop of individual donors who contribute money to such entities. Any attempt to open up the (capital) market to the social sector is an excellent move,” said Ravi Sreedharan, founder and director of the Noida-based Indian School of Development Management, which mentors social entrepreneurs.

There are only a few such exchanges globally, and they have adopted different models.

Launched in 2013, the Social Stock Exchange in London (UK), for instance, functions as a directory connecting social enterprises with potential investors. On the other hand, the local Ontario government-backed Social Venture Exchange (SVX) in Canada is an online platform where retail and institutional investors can invest in companies with a social or environmental impact.

The nature and ambit of India’s proposed social exchange, though, awaits clarity.

Concerns and safeguards

Experts point out that the exchange’s success will depend on the framework and processes governing companies that list on the platform.

“On hearing the term ‘social stock exchange,’ the first thing that comes to mind is that it will cover (for-profit) social enterprises and microfinance companies. We need clarity on whether it will cover non-profits,” said Arman Ali, executive director of the National Centre for Promotion of Employment for Disabled People, a Delhi-based NGO.

“Only registered companies can list on stock exchanges. There are unregistered entities doing good work in health, education and policy advocacy,” Ali added.

Even if not-for-profit NGOs are allowed to list, there may be issues related to compliance.

“Most NGOs are not good at keeping records and maintaining a paper trail. This could affect channelisation and tracking of funds particularly in case of smaller players, who do not have the resources to manage and keep records. One cannot apply the same rules that are applicable to corporates,” said Ali.

Hence, reporting and compliance requirements may need to be relaxed for NGOs.

Another task for the government is to work with NGOs and social enterprises and prepare them to absorb large funds.

“Capital markets work on a fairly big size. The stock exchange becomes valuable when big organisations become active,” pointed out Sreedharan. “Not many organisations barring micro-finance firms in the industry have the appetite to consume the large sum of money that may be raised through the exchange.”

Lastly, there is the task of ring-fencing the exchange from fraud. There are already talks of people looking to convert their black money into white on the social exchange, said Ali.

“The ecosystem is fragmented and there is a huge trust deficit. If built with transparency and good governance, this exchange will attract investors who traditionally have been adverse to social enterprises and will lead to larger societal impact,” said Prateek, chief executive officer, Assistive Technology Accelerator (ATA) a Bengaluru-based accelerator that invests in startups that develop assistive devices for disabled individuals.