Excerpts of the conversation on the concept of Social Stock Exchange proposed in India. This is the transcript of a conversation that I conducted on Mentza. To listen to this full conversational podcast, click the link below
Why do we need a social Stock Exchange?
Typically for people, the understanding of stock exchanges is that it is a place where money is raised and securities are traded, which means you can use Stock Exchange platforms for raising of capital and trading of securities and different types of other financial instruments. So if you look at the budget which was published for the year 2019-20, it was mentioned by Finance Minister that it is time when we should take the Capital Market closer to masses and meet various social welfare objectives related to inclusive growth and financial inclusion. So essentially, the idea for starting something like a social Stock Exchange is to bring the exchanges closer to masses so that the capital can be raised for various purposes.
And the purpose here is not to set up a new company or expand a business (like Zomato or Paytm listing its shares on the stock market) but the idea here is that through a Social Stock Exchange we will be able to impact the life of those people who need some kind of help or intervention, not essentially financially all the time.
So what will it do exactly? What are the activities that it will perform?
First of all there are two types of entities which can list themselves. Or for the purpose of raising funds. The first is non-profit organization. So if you are a non-profit organization of certain type, you can approach the Social Stock Exchange for raising capital.
What kind of capital can be raised?
There are different types of capital that can be raised by a non-profit. Through the exchange, these NPOs must do something where there is a clear cut social intent and impact. So these two things are very important. Suppose you are a non-profit organization set up as a trust and you want to raise money on social Stock Exchange segment of NSE. And what you can do is that you can issue some financial instruments. And raise money through them.
What is the meaning of “issuing a financial instrument”?
Companies raise money through bonds. Bonds are a kind of a loan instrument, which means when you suppose you are HDFC and you want to raise money from the market, then you can issue a bond. And on the bond you will have to pay interest to people who have given you money.
But on Social Stock Exchange, the kind of bond which will be issued, will not have interest, which means that for the people who are investing in these bonds, it becomes more like a charitable activity. Suppose there is a trust which is working, for example promoting education, employability and livelihoods, and it issues a bond on the social Stock Exchange then. You can be a subscriber and you can give money to that particular trust which is registered and listed on this particular social Stock Exchange. So what you are doing is a charitable activity. Many of you would know that there are many industrialists like Azim Premji for instance. He does a lot of philanthropy. Now what is the meaning of philanthropy? Philanthropy means he has got, he has amassed huge wealth so. Part of his wealth he gives back to the society from where he has earned this money. Now suppose there is a person who typically has been doing his own philanthropy now comes across an NPO (Non-Profit Organization), which has issued its bond. So rather than using his money in his own way, he will probably give some amount of money to this particular NPO which has raised the bond. So for the NPO it becomes a source of capital and now this capital when once it is raised, the capital will help the NPO to have the money for the welfare activity to your question.
In this case the bond will not pay any coupon, so it is called as a 0 coupon zero principal bond. so it’s not dividend. Dividend is paid on shares but coupon is paid on bonds. So we will use the word coupon in place of dividend. So you will not receive anything.
But it does not mean that a Social Stock Exchange is only for charitable activity. There are two types of entities which are allowed on social Stock Exchange. One is the nonprofit organization. So if you are a nonprofit organization, it is for sure that you are going for some kind of a support from someone because you are not working for profit. So since you are not working for profit then how will you get money? Somebody has to come and give you a kind of a donation or a support or somebody who’s doing charity activity will give you.
If you are investing in a 0 coupon principal security, it will be considered like you are giving money to that particular NPO, right? And there is a section 80 GG in the Income Tax Act where you can claim benefit up to ₹1,00,000 as a retail investor also in your income tax.
Social Stock Exchange is open for two types of entities, NPO and profit organization. Now suppose you are a profit organization and you are a company for instance and company is created for the purpose of profit then you can issue equity, you can issue debt instruments, and raise money from this particular Stock Exchange where normal investor like you and me can also go and make investments over there. There is a possibility of generating return. So broadly what it is helping in is that it is basically providing a platform. The idea is that you will do certain social eligible or listed or eligible activities. Like as I said, one example that I had given was about promoting education, employability and livelihood. But there could be other social activity also which can be included is that you want to eradicate hunger or reduce malnutrition. or you are working for protection of national heritage, art and culture. That is also a social activity. Social activity does not mean that it is every time linked to poverty, it’s not so narrow. So there is a section in the Companies Act which says what all are covered. And even supporting incubators for social enterprise where new ideas or testing can be done, is also part of the social activity. And if you are promoting say financial inclusion, which means essentially that you want more people to come under the gamut of organized financial activity where you are opening bank accounts and giving them access to the financial network, that can also be part of the social activity.
So just to make it more structured and understandable, Social Stock Exchange it is not a separate Stock Exchange. It is a sub part of these exchanges
But let me tell you that the idea of social Stock Exchange is not completely new or not something which India itself is starting for the first time internationally, many experiments have been made on the social Stock Exchange. If you read on Google, you will find that countries such as Canada, countries such as Brazil and many other countries like UK have already experimented with this concept of social Stock Exchange. Now in India’s setup, this becomes much more relevant for the reason that there is a need for a broader inclusion, social inclusion of people. And that is something which is very important during the COVID time what we realized was. That Indian society a very big section of the society is highly vulnerable to risk and uncertainties. And even today you would have read that the five kilogram food grain under Pradhan Mantri Garib Kalyan Yojana has been extended to 80 crore people for one more year.
Now if we are giving 280 crore people 5Kg of food grain for one more year. This is this kind of tells two things very clearly first. That either those 80 crore people really need 5 KG of food grain or our data is wrong, I’m not going to go with the second one because I would trust that, somebody would have definitely done the check up and then only this kind of huge scheme would have been launched.
So what becomes very important is that somebody is an NPO, somebody comes and says that I want to be listed, . So anybody will. Form an input and say that I want to be listed. I will raise money and money is coming in form of a charity. I will misuse that. So this here there is a control. A control has to be built because if you do not build control then what happens is people lo at opportunity and they then they start misusing the platform. So what would be the control here? So the control here is that there will be an audit done to check .
What classifies as social impact?
A social audit will be mandatory for the entities which are coming on the social Stock Exchange. Now this is this is very interesting because typically the audit that happens, we know that businesses, organizations and certain other entities have to undergo the undergo the process of audit if your business volumes exceed a limit, right? Even a lawyer will have to get his bo audited if he is making a good amount of money beyond a threshold. So there is a. There is a clear cut aspect which is very, very important here is that you will have a social audit done and in order to ensure that there is no misuse of funds, only reputed firms, institutions , which will be which have the expertise here will be allowed to do the social audit. So social audit also needs to be because it’s it could be something which where there could be a lot of grey areas or there could be areas which can be debated. But because it’s a new thing which is emerging, so how do you ensure that, . And it is also being said that there is going to be newer qualifications which will be created for this. So what is being said that an NISM National Institute of Securities Market will start a certification program for such people.
How does valuation happen?
There is a question from listeners which has come up about valuation. Let me take it up. Valuation will not be on the basis of audit of NPO. In fact there is no valuation involved here. What is being checked here is that you are the right entity which is raising the fund for the right purpose. So there is a control point here and if you are an NPO then you are raising money mostly in the form of a charity philanthropy contribution. Valuation of the securities will not be applicable in case of NPOs.
One more aspect that one needs to know is that there is going to be a concept of capacity building fund which is also being created here.
What is the meaning of capacity building?
For instance, if you go to some of the smaller entrepreneurs, like a woman entrepreneur who wants to start a business, but she may not be aware of how to write a business plan. She is just working for making Pickles and the business is very small. So the idea of capacity building is to create some kind of capability in the people to help them understand how to do bare minimum things. Everyone may want to do business, but they may not have that kind of a capacity. So there is a provision for a capacity building fund of 100 crore. And that will be created to enable NPOs and other stakeholders to navigate the SEC and its proposed instruments. And so for the SEC, this kind of an instrument is being created. Now when SEBI had come out with its concept paper on this particular instrument, there were multiple suggestions which were given and the committee which was set up or rather a working group which was set up was set up under the chairmanship of Ishaat Hussain . He is the next director of Tata Sense and the entire team has worked on it and given a given a recommendation. SEBI in order to ensure that this social Stock Exchange idea picks up in the days to come. So that is that is the reason this particular concept is going to become important in the days to come and you will see a lot of newer instruments getting introduced in the market in terms of this particular Stock Exchange.You will see new ideas, new thoughts getting discussed. So this is where I thought I will come out with this discussion and that’s why I have initiated this circle.
Is it for common man also or only for entrepreneurs?
It is for common man also – as a retail investor also you can contribute your money. This is open for everyone. Corporates can contribute, retail investors can contribute and other entities can also contribute. But who can be a listed entity that is not for common man. So an individual cannot say that I want to raise money for social impact or social intent. It has to be NPO or a for profit organization. But investment can be done by anyone.
So the final few words is that now that BSE and NSE both have received the the approval from SEBI to start this shortly. Some of the newer sub segments of exchange have already picked up in India like we had the SME (Small and Medium Enterprise) segment. So I’m very hopeful that we will see going forward this Social Stock Exchange also picking up and achieving its social objectives.\