Regulatory Framework of Social Stock Exchange - Report Writing - Law Assignment Help

Assignment Task

Title
REGULATORY FRAMEWORK OF SOCIAL STOCK EXCHANGE

ABSTRACT
Social finance is considered to be the mainstream problem in India for goods and services which targets the disadvantaged and poorer sections of the society. It is proposed by Indian finance ministry in the recent budget speech to create a separate system to for fund raising to help the disadvantaged people of society. Social stock exchange is a platform on which social enterprises, volunteer groups and welfare organizations will be listed so that they can raise capital. The proposal has attracted much attention, and social entrepreneurs, among others, have said that the move can have a revolutionary effect on how they tap investors for capital. With social finance, impact investors put their capital behind enterprises that profitably cater to underserved populations by expanding access to critical goods and services, such as healthcare, affordable housing, credit, and quality employment etc. A unified platform can bring in greater transparency for nonprofits, and help both individuals and the corporate sector evaluate organizations they would like to give money to. Such a platform can help with both discoveries of organizations and in impact evaluation, which is otherwise expensive. The fund channeling capability of social stock exchanges for the purpose of social upliftment of society will certainly be a game changer for those who have fire to do something for the society but lack resources.

The present paper highlights the basic concepts of Social Stock Exchange and various terms associated with it, such as Social Enterprises and Impact Investment. It also analyses the opportunities and challenges for setting Social Stock Exchange and how it will function. The paper further exhibits how would social stock exchange help in Indian context? In the end paper studies the probable challenges in introducing Social Stock Exchange in India.

INTRODUCTION
The Millennium Development Goals (MDGs) and the Sustainable Development Goals (SDGs) have provided a set of common aspirational targets for governments to build a more sustainable, safe and prosperous world.
India is estimated to need over USD 2.6 trillion in investment to meet the UN Sustainable Development Goals by 2030. Capital is also a key requirement if India were to substantially improve its abysmal Human Development Index rank of 129 out of 189 countries. However, with India’s structural fiscal deficit, raising capital to solve for social problems is a Herculean task, especially in the post Covid scenario.
In tandem, the corporate sector has begun to adopt a variety of measures to ensure that their activities are not causing harm to society or the environment. Investing has also shifted towards an Environmental Social Governance (ESG) framework.
The Hon’ble Finance Minister as part of the Budget Speech for FY 2019-20 had announced
“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. I propose to initiate steps towards creating an electronic fundraising platform-a social stock exchange-under the regulatory ambit of Securities and Exchange Board of India for listing social enterprises and voluntary organizations working for the realization of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund.”
Thus, in India, the concept of the SSE gained publicity after the union finance minister 2019-20 budget speech, wherein she outlined the vision of the SSE to meet various social welfare objectives related to inclusive growth and financial inclusion. The Economic Survey released by the Union Ministry of Finance on January 29, 2021 highlighted the concept of setting up a social stock exchange (SSE) in India for raising capital by organisation’s working for the realisation of a social welfare objective. It will be under the regulatory ambit of the Securities and Exchange Board of India (SEBI),
SEBI then constituted a working group(WG) to make recommendations for a regulatory framework for listing financial instruments issued by social enterprises and to give a fillip to sustainable and responsible investing practices in India. The WG submitted the report on June 1, 2020. It outlined its vision and made recommendations, which include participation of non-profit organisations (NPO) and for-profit enterprises (FPE) on SSE subject to committing to minimum reporting requirements. The WG has recommended standardisation of financial reporting by NPOs on SSE.
This is not a new idea. Developments in ethical business practices and regulation frameworks from around the world, particularly from the European Union and North America, have been key drivers pushing for reform in Indian laws. These, for instance, include changes to India’s Companies Act, 2013 to ensure that businesses work in the interest of all stakeholders including the community and the environment. SEBI’s annual business responsibility reporting requirements and the Ministry of Corporate Affairs’ National Guidelines on Responsible Business Conduct in 2018 and the National Action Plan on Business and Human Rights of 2019.
At present, India has a number of avenues through which the social sector (non for profits and for-profit social enterprises) receive funding. These are Corporate Social Responsibility (CSR), impact investing, Socially Responsible Investing (SRI), philanthropic/Government grants, amongst others. The SSE aims to achieve an integration of all these diverse avenues into a common national platform and establish a uniform framework in reporting and measuring financial and social returns. Thus, the SSE has an instrumental role to play in unlocking greater capital available for social impact funding by

i) enhancing visibility of social enterprises,
ii) institutionalizing innovating fund-raising instruments, and
iii) building confidence amongst funders by formulating a common standard for reporting and evaluation.

A social stock exchange (SSE) as envisaged by a recent report by the Securities and Exchange Board of India (SEBI) “The SEBI Report” enables Indian social enterprises to list their securities or other financial instruments, providing them with an avenue for raising capital for their operations and growth, and reducing their dependency on ad hoc funding like grants or donations. This would operate as a separate segment under existing Indian stock exchanges, enabling socially minded investors to diversify their investment portfolio and developing a strong social securities market in the country.
The British Council Report observed that 32% of Indian social enterprises have seen a general lack of understanding among banks and financial organisations about their work and 20% reported a lack of awareness amongst community members about their goals, functions and objectives. The report also found that about 33% of Indian social enterprises felt that their limited networks act as a barrier to accessing investors.
SSEs would help improve visibility and knowledge, among all stakeholders, especially funders, issuers and customers, about the contributions of social enterprises to the economy. They would also establish procedures to standardise social finance transactions, build awareness about the needs and challenges of this sector and develop social capital.
These stock exchanges would bridge the funding gap for social enterprises and enable a growth of strong professional networks of investors and subject matter experts in order to guide social enterprises. They therefore create the necessary social investment ecosystem for enterprises and investors, whose objective is to generate maximum positive social impact and place environmental, social and governance (ESG) features within the pursuit of profits and growth.
The SEBI report provides a simple and succinct definition of a social enterprise as “a class or category of enterprises that are engaging in the business of ‘creating positive social impact’ which are then categorised as NPOs and FPEs.
SEBI’s proposal to standardise the minimum reporting framework for measuring the social impact of both NPOs and FPEs, with the use of clearly defined metrics, is noteworthy.
This can provide investors and regulators with clear and in-depth understanding of the work these enterprises carry out and, more importantly, accurate information about their governance, funding history, status of their legal/regulatory compliance and financial situation.
However, as the SEBI report recognises, in practice, this may pose a substantial challenge for NPOs on account of the sheer number operating in India, the diverse range of activities they are engaged in, the fundamentally different nature of operation of NPOs and FPEs and vastly differing expectations that investors have from them, all of which makes this task extremely difficult.
In the absence of a clear understanding of the contours of the Indian social investment ecosystem, attempts to operationalise SEBI’s suggestions may face substantial challenges.
The regulatory framework envisaged for the Indian SSE should clearly discourage such ‘quick return’ demanding investors and, at the same time, educate investors to deepen their understanding about ‘good returns’ on their investment.
SEBI’s proposals pose certain operational challenges that need to be addressed before the SSE can function. Even in the absence of any obvious regulatory hurdles for listing so far, Section 8 companies have not been enthusiastic about taking up the existing option of a direct listing of shares or debt instruments due to their ‘inherent inability to provide financial return on investments’. It is not clear how the proposed Indian SSE can ensure that this does not occur to non-profits going forward since investment in such enterprises also cannot assure market returns.
As the Covid-19 effects on the world economy show, it is critical for public and private sources of capital to come together and develop ingenious methods to ensure that capital flow to the social sector is unhindered and capital is utilised effectively to generate a lasting impact for the community.
Institutional support through SSEs ensures that more investors are encouraged to integrate environmental aspects (such as resource conservation, environmentally sustainable working practices), social aspects (including privacy, data protection, employee welfare) and governance aspects (like board diversity, conflicts of interest resolution mechanism, independent oversight of management) into the evaluation of enterprises, moving beyond financial statements.
To this end, all efforts need to be directed to make sure that an enabling regulatory environment is created for the planned SSE with a minimal compliance burden imposed on the enterprises, social entrepreneurs and investors. There should be clear listing criteria set out for social enterprises using this platform, and the listing guidelines should provide investors with sufficient incentives to increase their investment. The standards of social impact assessment and financial reporting should be kept robust to maintain credibility.
SEBI should work with Indian stock exchanges to spearhead the movement to build awareness among the NPO community about the advantages of listing on the SSE, including the scope for innovative structuring of investment transactions, through which these enterprises can tap into several funding sources. This can infuse dynamism into the social sector to bring in the expertise to drive change and sustain long lasting reform.
Social stock exchanges now operate across the globe. Support should be extended to such initiatives in India’s efforts to enable the country to catch up with the rest of the world.

LITERATURE REVIEW
1. Budget 2019-2020 Speech of Nirmala Sitharaman Minister of Finance July 5, 2019
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. I propose to initiate steps towards creating an electronic fund raising platform – a social stock exchange - under the regulatory ambit of Securities and Exchange Board of India (SEBI) for listing social enterprises and voluntary organizations working for the realization of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund.

2. Ishaat Hussain, Chairman Working Group on Social Stock Exchange (2020)
The SEBI SSE Working Group is proud to publish this report that gives form and content to the Hon’ble Finance Minister’s vision. In the report, the Working Group has laid out the modalities for creating a Social Stock Exchange that will serve as a platform for fundraising and also incorporate a set of procedures by which social impact will be measured and reported. One of the biggest challenges faced by NPOs is visibility to investors and donors. By pairing innovative instruments by which NPOs could associate with the SSE (among them direct listing via a new class of securities), with a reporting standard that offers investors and donors a standardized framework for measuring social impact, the Social Stock Exchange will revolutionize the state of play in the social sector. That is not all. An entire ecosystem of actors will organically grow and evolve as a result of the report’s recommendations being implemented. In time, this ecosystem centered on the SSEwill chart a course of social and economic development unlike anything that India has previously witnessed.
Dr R Balasubramaniam, Roadmap of Social Enterprise Ecosystem as a Precursor for a Viable Social Stock Exchange in India.(2020)
A basic prerequisite for a Social Stock Exchange is a Social Enterprise ecosystem that is ready to participate in SSEs. Social enterprises have to be oriented towards revenue generation and financial sustainability (while ensuring that social purpose is primary), robust governance and measurable social impact in their functioning. GRAAM has thus taken up a secondary data based study to extensively analyse the Social Enterprise system in India, identify its gaps and challenges and suggest the appropriate legal form for Social Enterprises.

1.Adhana, D, Social stock exchange: An innovative financing platform for social enterprises in India. (2020)
Social finance is considered to be the mainstream problem in India for goods and services which targets the disadvantaged and poorer sections of the society. Social stock exchange is a platform on which social enterprises, volunteer groups and welfare organizations will be listed so that they can raise capital. With social finance, impact investors put their capital behind enterprises that profitably cater to underserved populations by expanding access to critical goods and services, such as healthcare, affordable housing, credit, and quality employment etc.
A unified platform can bring in greater transparency for non-profits, and help both individuals and the corporate sector evaluate organizations they would like to give money to. Such a platform can help with both discoveries of organizations and in impact evaluation, which is otherwise expensive. The fund channeling capability of social stock exchanges for the purpose of social upliftment of society will certainly be a game changer for those who have fire to do something for the society but lack resources.
2. Pavlov, R. September. Social Stock Exchange as a Factor of Increasing the Innovation Potential of Social Enterprises.(2017)
Social enterprises play a very important role in modern societies, as they can be seen as effective ways of improving the wellbeing of disadvantaged groups of people, and they contribute much to the economic growth. As the public expenditures tend to decrease for the recent decades, social entrepreneurship can be seen as a way of substituting the public functions in those cases, when the invisible hand of the market fails to increase the social welfare and only increases the social inequality instead. Social enterprises are those, which tend to be sustainable, but in fact only few of them can be profitable so that they could not depend on external financial sources. The range of financial sources is rather wide, and it includes such popular tools as micro-finance loans, crowdsourcing, grants, donations and corporate gifts. Nowadays a new financial tool for supporting social enterprises, namely, the social stock exchange, has emerged. It emerged in such countries, as Portugal, the United Kingdom and the United States. It reminds in some ways a conventional stock exchange, though it has its own peculiarities, which cannot be reduced to an ordinary stock market.
These peculiarities can be summarized as follows: maximizing social value instead of private profit, the lack of well-developed infrastructure to attract potential investors and the lack of hard competition between the investors at this market, which results in the limited potential of increasing the share prices. Nevertheless, it presents an interesting phenomenon, creating a new form of attracting investment for social enterprises.

3.Varsha Aithala, Idea of Social Stock Exchanges for India
Social enterprises have the potential to make a significant impact on India's society and economy, but they struggle to find sustained funding. Social stock exchanges can help bridge the funding gap and create an investment ecosystem for such enterprises.

4. Chichanni, The Rise of Social Stock Exchanges(2015)
Ultimately, social finance affects important decisions regarding allocation of creativity, capital, and entrepreneurship. It affects growth of new markets, business structures, and commodities within existing societies. It is interesting to note that SSEs were a response from unconventional actors, namely private sector fund managers that saw real value in creating a more holistic investment market. To allow this parallel economy to grow, it remains our collective responsibility to create positive ecosystems for SSEs so that they become not just another fad, but rather a normal way of living and thinking on par with traditional markets.

5. Karen Wendt, SSE - Democratization of Capital Investing for Impact (2017)
The demand for investments that combine financial return with desired social or environmental impact is growing. Given the recent upsurge in entrepreneurship, shifting attitudes towards the role of business in society, and a broad policy push for sustainable development, there should also be no shortage of investors and financier’s eager to absorb this demand. The problem, as emphasized both by WEF and UNEPFI, lies in matching assets that create positive impact with investors in a manner that is efficient, effective, transparent, and scalable.
In other words, redirecting investment and finance, to impact oriented investments compatible with the UN Sustainable Development Goals (SDG) and the Paris Agreement is a key factor in turning around the investment philosophy. The same applies to the process of creating and growing impact assets, and supporting entrepreneurs in their search for capital. Both factors are crucial for making the ‘impact economy’ grow exponentially rather than linearly.
Today impact investing is mostly the domain of wealthy individuals, foundations, and family offices. Non-accredited investors and/or retail investors plus pensions funds are not yet able to meaningfully participate in this new way of investing. This is because of a lack of products, a lack of access to products available to more affluent investors, a lack of impact advisors serving that segment of the market, and a lack of transaction platforms . It has been argued that not enough assets can be found that match the impact definition.
The creation of regulated funding platforms known as social stock or impact exchanges (SSEs) has been proposed as a necessary step towards democratizing and popularizing impact investing, easing the asset search process for investors and capital access for entrepreneurs. While the need for SSE is heavily debated in expert circles along with the challenges they may bring about, the first SSEs have come into existence in the UK, US, Canada, and Singapore, complemented by some smaller SSEs in Brazil, South Africa and Kenya.

6. Bandhini, SSE : Innovative Financing For International Development
Currently, the main challenges lie in building a critical mass of social businesses that are ‘market ready’ to make SSEs viable, and developing a common terminology and consistent valuation parameters for all players in the field. In this regard greater harmonisation of entrepreneurial know-how from both sides of the globe would assist in building this critical mass. One approach is fragmenting the operations of existing charitable

7.Anusha Bhagat ,The Advent of Social Stock Exchange in India (2020)
As per a survey conducted by Brookings India, 57% of the social enterprises identify access to debt and equity as a barrier to growth and sustainability. The advent of an SSE in India presents itself as a promising, ground breaking and an illustrious step to bolster the impact investing ecosystem in the country and improve access to larger pools of capital for the social sector. This development also comes at an opportune time when the demand for financial returns coupled with desired social or environmental impact, is growing manifold. Thus, an SSE in India is uniquely poised to pave the way towards building a fruitful partnership between conventional and social capital, and ensuring greater inclusive growth in the country.

8. Sarah Dadush,Regulating Social Finance : Can SSE meet the Challenge
This article argues that social-financial hybridity presents a pressing regulatory challenge that must be addressed. It evaluates the potential for three newly established Social Stock Exchanges (SSEs)—platforms designed to connect investors with social businesses in need of capital—to bridge this regulatory gap. Treating SSEs as transnational rulemaking laboratories for social finance, this study reveals how current regulatory frameworks fall short of filling the hybridity cracks through which beneficiaries can slip and recommends measures for correcting this deficit.

STATEMENT OF PROBLEM
A social stock exchange (SSE) as envisaged by the Securities and Exchange Board of India (SEBI) “The SEBI Report” enables Indian social enterprises to list their securities or other financial instruments, providing them with an avenue for raising capital for their operations and growth, and reducing their dependency on ad hoc funding like grants or donations. This would operate as a separate segment under existing Indian stock exchanges, enabling socially minded investors to diversify their investment portfolio and developing a strong social securities market in the country

HYPOTHESIS
The effectiveness of the proposed SSE in India will depend on government policies to efficiently run the SSE and government’s capability to build confidence, of the private investors, in the SSE.

RESEARCH QUESTIONS
While examining the above hypothesis an attempt shall be made to answer following questions:
1. How far SSE would be successful in impact financing in India ?
2. What additional system are needed to make is effective ?3. What are the Opportunities and challenges to SSE.?

RESEARCH OBJECTIVES:
The study has been geared to achieve the following objectives;
To study the basic concepts of Social Stock Exchange
To compare of Social Stock Exchange and Conventional Stock Exchange
To study the proposal of Social Stock Exchange in India.
To study the probable challenges in introducing SSE in India .RESEARCH METHODOLOGY:
Methodology This is a desk-research based study, based on the analysis of available literature on the topics of Social Enterprises and Social Stock Exchanges. The study involved collection of data from diverse and authentic sources such as academic papers, study reports of reputed organizations, annual reports of concerned organizations/regulators, websites of organizations and government sources. The collected data has been analyzed and organized thematically and presented in a concise form in this report.
Data Collection Method :This study has been carried out with the help of secondary data only, all the data has been collected from the various sources such as websites & reports and compiled as said by the need of the study.
Sources of Data Collection: The study is based on the published data. For the purpose of present study, the data was extracted from the various newspapers, journals, articles and websites particularly from Securities and Exchange Board of India and Ministry of Commerce. Budget speech of July 2019 has also been analysed.

SCOPE AND LIMITATION
The scope of the paper is wide enough as it deals with the origin, development and concept of Social Social Exchange(SSE) in India, but the limitations of the study is that the SSE in India is only a two year old Concept due to there is a very dearth of any research or literary works on the topic specifically pertaining to the critical analysis of the Concept in the light of the report submitted by the working committee of the SEBI.

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