Why social stock exchange is bad for for-profit social enterprises

Author: Arvind Agarwal, Founder & CEO - C4D Partners

Publication: Free Press Journal

NPOs and FPOs are currently receiving funds through crowdfunding, CSR activities, philanthropic donations, etc. The idea of a Social Stock Exchange is noble and may help SEs raise funds and reach out to the public in general.



In FY 2019-20 budget, Finance Manager Nirmala Sitharaman highlighted the need for Social Stock Exchange (SSE), and on September 28, 2021, SEBI approved the creation of SSE.


The entities will encompass Non-Profit Organizations (NPO) and For-profit Organizations (FPO) targeting the less privileged and underserved in any of the 15 broad categories of social welfare activities specified in the SEBI technical committee report.


Activities such as eradication of poverty, inequality, malnutrition, promotion of healthcare, gender equality education, preservation of nature, etc. were listed as per Schedule VII of Companies Act 2013. To enlist themselves as Social Enterprise (SE), 67 percent of their social welfare activities need to qualify as eligible activities.


The NPOs and FPOs are currently receiving funds through crowdfunding, CSR activities, philanthropic donations, etc. By enlisting them on SSE, NPOs and FPOs will be able to raise capital through mutual funds, zero-coupon bonds, equity, social impact funds, and development impact bonds.


Having an exchange like this would be helpful not only to social enterprises seeking funds but also to investors looking for companies doing business in the social sector. SSE will help build investors' confidence to invest funds in SEs as it promotes transparency. The listed SEs will be subjected to enhanced continuous disclosures encompassing financial, governance, and social impact. They will also be subjected to mandatory social audits.


Around the world, SSEs have been set up in Brazil, Portugal, South Africa, Jamaica, Canada and Singapore. Its narratives haven't broadened in developing countries due to a lack of meaningful literature and a dearth of analysis on SSE. At present, the Jamaican, Singaporean, British, and Canadian social stock exchanges are functional.


Aspirants to the social stock exchange face numerous challenges. First and foremost, the difficulty in quantifying and standardizing social impact metrics within and across sectors (such as poverty, health, education, environment). Even with the development of standardized tools such as the GIIRS and IRIS, impact measurement and evaluation remain problematic.


Various instances globally have determined that listing on SSE is constrained to mid-large organizations. The intensifying list of social enterprises listed on Canadian, UK SSE recorded a median revenue of USD 4.7 million and 8.2 million, respectively. It exhibited an in-varied scenario where only mid-big market players get the maximum share of listing on the exchange. The reach thus gets restricted for small players despite India's SSE being an impetus originating from the government.


Though the idea of a Social Stock Exchange is noble and may help SEs raise funds and reach out to the public in general, the question is whether FPO and NPO both should be part of this exchange? Will it be beneficial for both?


SSE has considered NPO and FPO as social entities; however, this will be detrimental to the growth of the FPO sector. Investors will not be able to differentiate between FPO and NPO. NPO creates a social impact and does not generate a return on investment, whereas FPO works to create impact and earn profit. Considering them on the same platforms will make FPO lose potential investors who focus on social impact and return on investments.

Once the SE enlists themselves on SSE, their valuation will depend on the share movement in the secondary market. However, investors will not invest with the expectation of a dividend or return on investment. They will invest to support the social cause. This will affect the SE's valuation, esp. FPO and further impacting them in the next round of funding.


The retail investors are not well educated financially, and treating FPO and NPO on the same platform will confuse them. The retail investors may prefer to invest in an FPO only, as they will be able to earn return along with helping a cause. They will not be able to make the difference between the two, further making them lose interest in the investment on SSE. This will harm the SSE's objective of motivating the retail investors to invest in NPO and FPO.


Providing financial education will motivate and educate investors, such as DFI and retail, to invest in NPO through SSE.


To ease the process, FPO should be more aligned to the regular stock exchange, and the game rules need to be changed. The commercially focused companies should be forced to adapt and evolve as commercial and social enterprises. A new index- ESG, can be created on the regular stock exchange to ease FPO and encourage companies to work towards social impact. Moving FPO and commercially focused companies on the same platform will benefit the country. It will add pressure on the companies, and they will feel compelled to start working on Environmental, Social, and Governance (ESG).


By treating NPO and FPO on different platforms, the investors get clarity on the type of organization they are supporting. They get the right to choose to invest in a company working only for a social cause.


There is an ambiguity concerning the activities covered to enlist an SE. For instance, NPO working towards the welfare of the war veteran, war widows, and the dependents of the armed forces will be able to enlist themselves on SSE; however, there is no clarity on FPO hiring only war veterans. FPO will find it challenging to qualify among all the 15 activities listed to enlist them on SSE, even if their business model supports the cause.


To conclude, before rolling out SSE, the government needs to work on the clarity of various rules and regulations, keep a check on how every social impact organization can benefit from the platform, and, most importantly, set a clear distinction between FPO and NPO. SSE should entirely focus on not-for-profit organizations. It is advisable to bring the commercial entities and FPO together, as nowadays, commercial entities also focus on creating a social impact.


Although SSE is a distinct segment of the existing Indian stock exchanges, their governance, design, and operations should reflect the deeper purpose they serve.