By Jayant M. Thakur
Chartered Accountant
Imagine a situation where a humanitarian
crisis or disaster takes place. A cyclone, floods, or, as is happening right
now, the Covid crisis. But even without a crisis there are human misery and
needs of various kinds. In the ordinary course, the government, some Indian /
international charitable organisations do take the initiative to provide
relief. However, often there is confusion and a scramble. Those in need do not
know whom to approach for help. Those who wish to donate funds or services do
not know who needs the funds / services and also which are the reliable
organisations that will really help the needy. Even the relief organisations
may be at a loss to find the needy and / or find those who can fund the relief
measures that they are ready to carry out.
Now, imagine if there was a smooth and
seamless system to coordinate the efforts of all such persons – the needy, the
donors / volunteers, the relief organisations, etc. – a system whereby funds
from those willing to help definitely reach the needy. The proposed model of
Social Stock Exchange (‘SSE’) as envisaged by a recent SEBI Working Group
Report, envisages just that. A whole eco-system is proposed in which, in a
variety of innovative ways, funds from those who have and also want to give,
reach those who need those funds. What’s more, there is also scope for
investors to participate in it and earn returns!
The objective essentially is to provide not
just information and coordination to all concerned, but also lay down a system
of checks and balances, reliable information, well-defined disclosure standards
and an audit mechanism. The system can use existing and new infrastructure and
systems to help raise funds in the form of securities and other instruments.
Such a report has just been released and
comments have been invited on it. However, considering the ambitious goals and
also the numerous structural changes and the set-up needed, it may be years
before they are fully implemented. However, a quick start is quite possible and
some major steps could be taken in a short time.
BACKGROUND
The Finance Minister had, in her Budget
Speech for financial year 2019-20, declared the decision of the Government of
India to set up a Social Stock Exchange to help raise funds for social impact
investing. She said, ‘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 organisations working for the realisation of a
social welfare objective so that they can raise capital as equity, debt or as
units like a mutual fund.’
Shortly thereafter, a working group was set
up and, after due consultations / deliberations, its report giving
recommendations has been published for public comments.
It is a fairly detailed report that makes
several suggestions on how to go about implementing the proposals made by the
Finance Minister. It surveys the global scenario and consciously makes
proposals much beyond most practices in prevalence. It envisages not just the
setting up of an SSE but discusses several other aspects of the eco-system and
also various products / structures that can be developed to ensure a
sophisticated and effective system.
The needy
That India has numerous needy sections
requiring relief goes without saying. Rural poverty, medical relief,
educational assistance, etc. are broad needs, while disaster relief is also
often required. The relief does not have to be merely the giving away of cash,
but also assistance in kind and / or service in various forms. Often, such
needy persons inhabit the interior parts of the country and hence it is also
vital that the relief has to be structured in such a way that it reaches them.
Such needy persons are unlikely to have direct knowledge and contact with those
who are able and willing to provide relief.
The relief organisations
The report
suggests that in India there are more than 30,00,000 (30 lakh) NGOs and other
organisations, small and large, able and willing to provide relief to the
needy. These include small social service organisations with a tiny set-up, to
large international organisations having extensive manpower, systems and
knowhow. They, however, need information about those who are in need of relief
and also knowledge of those who may provide funds for relief. They also need
knowhow of how to present their credentials to demonstrate that they have been
doing effective work. This would include a language of standardised benchmarks
and parameters to show their effectiveness. That they meet such benchmarks also
needs to be certified by ‘social auditors’ competent in this field.
The donors
There are several large international
donors, small and medium-sized donors / trusts, corporate donors (particularly
those who allocate funds for CSR work) and of course the millions of individual
donors who would want to make a difference to the needy. Then there is the
government itself which allocates large amounts of monies for relief work of
various types. However, all these need either direct access to the needy if the
relief provided is simple, or to organisations carrying out relief work to whom
they can donate funds or even provide honorary services. For this purpose, they
would want to be assured that their funds and services are put to the most
effective use so as to have the best social impact.
SOCIAL STOCK EXCHANGE – A model that brings together the various parties and helps
set up an eco-system
The report recognises that there are many
scattered organisations of various types who offer relief and provide
coordination and information in this regard. The need, however, is for a
complete and common eco-system whereby the needy, the relief organisations, the
donors and various other service entities are connected with each other. At
present, some bodies do provide part of such services / eco-system. However,
the report suggests that a Social Stock Exchange could serve as a centralised
body for enabling such an eco-system. Internationally, there are many SSEs of
varying kinds. However, the report seeks to go far ahead of such SSEs and
provide not just an information system but also a wide variety of funding
structures including listed securities that are tailor-made to meet such needs.
Some of the suggestions in this regard are described here.
Information repository
An accessible database of various relief
organisations would be set up under the aegis of the SSE. It would have
detailed information of the governing bodies, financials, track records of
relief work in a language of benchmarks and parameters that are well
established, well defined and understood by those familiar with the system. The
repository would have other relevant information, too. Anyone, including
donors, can access the information and find the relevant information.
Standards / benchmarks and disclosure
standards
Just as financial statements have a language
to present financial information to financially literate users, a similar set
of languages / standards and so on would be needed so that relief organisations
can present the work they have done in objectively understood / measurable
parameters. This would demonstrate their effectiveness.
Social auditors
Like auditors of financial statements,
social auditors would be needed to verify that the information disclosed by
relief organisations is fairly and correctly stated. This would give
reassurance to readers of such statements.
SECURITIES AND INSTRUMENTS OF VARIOUS
KINDS
While stock exchanges are normally conceived
of as a place / platform for transactions in securities of various kinds, the
SSE would not be focused on equities in the traditional sense. The securities
on the SSE would enable finance to reach relief organisations. The investments
may be in the form of equity or bonds of various kinds. If the projects in
which investments are made achieve the social benefit / impact promised, the
investors would get their monies back, possibly with some returns. Donors and
similar organisations would effectively provide monies for return of the funds.
The securities could also be traded on the SSE. If the project fails wholly or
partially, the amount invested may not be wholly returned. Loans from banks /
NBFCs may also be made in a similar manner. Different structures have been
suggested depending upon whether the organisation is For-Profit or
Not-For-Profit. The varying legal structures of such organisations (e.g.,
trust, section 8 companies or even individual / firm / company) have been noted
in the report and that the funding / securities structure would be different
for each such group.
The report also provides a structure for
deployment of CSR funds, including even trading in CSR certificates. Thus, for
example, CSR spends in excess of the prescribed minimum could be transferred to
others who have not been able to find appropriate projects for their own
spends.
Alternative Mutual Funds are also expected
to carry out a significant role in helping routing of such funds in the form of
units.
LEGAL / TAX HURDLES
The report conceives of an eco-system for
which much would be needed in terms of amendments in securities, tax and other
laws to enable it to fructify. The SSE itself would be under primary regulation
of the SEBI subject to possibly a separate sector regulator at a later point of
time. The SSE could be a separate platform under existing stock exchanges since
they already have the infrastructure.
However, several changes would have to be
made in law.
The securities laws would have to be amended
to enable the new forms of securities suggested. The Regulations relating to
Alternative Investment Funds would also require amendments. SEBI would have to
be given powers to provide for registration for various agencies, for
supervision, for prescribing disclosure requirements, levy of penalty, etc.
The report emphasises several changes in tax
laws. Requirements relating to registration / renewal of charitable
organisations, particularly the changes made in the recent Finance Act, 2020,
are suggested to be simplified and relaxed. Further, tax benefits for CSR
spends through such SSEs, for donations / investments made through an SSE, etc.
are recommended.
CONCLUSION
The implementation of the proposed structure
would take place in stages. It may even otherwise take time for various
organisations and entities to understand and become part of the proposed
eco-system. However, the recommendations do make for an inspiring read. The
system could provide the most effective use of the funds given in the form of
grants, donations and even investments. Organisations that work well would get
formal recognition in a language and in the form of parameters that are
commonly understood in the industry. There would be faith in the system that
would be reinforced by the supervision and discipline of SEBI.
Chartered Accountants would obviously have a
major role to play. They would be closely involved in advising corporates,
relief organisations and even donors on law, tax, structuring, etc. Preparation
of financial statements and even reports to present the social impact /
performance of such entities would be a new and refreshing challenge. It is not
expected that their involvement would be purely honorary or as social work.
One looks forward to speedy implementation
of the recommendations of this report which could usher in substantial changes
in the present system
