Finance Minister promises to introduce Social Stock Exchanges in the country.
As part of the presentation of the Union Budget 2019, Finance Minister Nirmala Sitharaman announced a plan to create a social stock exchange for social enterprises and voluntary organisations. This is a new concept for India, though such stock exchanges already exist in several countries. Hence SRRF Dialogue will look into the concept of Social Stock Exchanges, how they function and how voluntary sector could benefit from the same. In a series of posts, SRRF Dialogue will also look into how these exchanges have been functioning in other countries.
Finance Minister in her Budget speech stated that it is time to take capital markets closer to the market and meet various social welfare objectives related to inclusive growth and financial inclusion. She proposed to initiate steps towards creating an Electronic Fundraising Platform – a social stock exchange – under the regulatory ambit of SEBI for listing social enterprises and voluntary organizations working for the realization of social welfare objectives so that they can raise capital as equity, debt or as units like a mutual fund.
This is a useful and important concept for enhancing financial viability of social organizations. It could require a fundamental change in legislative and regulatory frameworks of these organizations. Currently we have non-profits, which cannot undertake trade, commerce or business while undertaking charitable activities, any hint of profits and tax authorities would like to cancel their charitable registrations. Proviso in case of S. 2(15) officially limits this being upto 20% of income (read turnover), provided it is in the course of advancement of a non-profit’s charitable objects, in other words incidental to the charitable objects. Non-profits under other limbs of S.2(15) can undertake trade, commerce or business.
Thus to start recognizing social enterprise is essential but have different characteristics from that of a non-profit or for-profit. To start with necessary legislation will need to be put in place to identify such characteristics and what benefits will be available both to such enterprises by listing on such stock exchange and to investors. Govt could initiate the process both by setting up such an exchange and providing some tax benefits. How CSR funds could impact business modeling of such stock exchanges is also yet another question that Govt could look into. In fact considering Govt tightening noose around institutions receiving FCRA funds, could this be the harbinger of new method of funding the voluntary sector.
Idea of social stock exchanges is that it allows such social enterprises to be listed on one platform giving them greater visibility and if this platform is used by investors to make investments, then these enterprises can also raise capital from such investors. The exchange sets disclosure requirements for such enterprises and vets any proposal that they put on such exchanges for raising funds.
In future posts we will cover how stock exchanges work in other countries and understand their positives & negatives.
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