The Securities and Exchange Board of India last week put out a set of proposals on social stock exchange. The idea was first mooted by the Finance Minister Nirmala Sitharaman in her July 2019 Budget and now SEBI is trying to give a shape to the novel proposal based on committee recommendations.
The SEBI-constituted committee has broadly classified fund-raising by two verticals — for-profit social enterprises (FPEs) through equity and social venture funds (SVFs); and by non-profit social enterprises (NPOs) through zero-coupon zero-principal bonds, SVFs, mutual funds, various pay-for-success structures, other securities and units that may evolve.
How the bonds will work
The committee believes that there is a great opportunity to unlock funds from donors, philanthropic foundations and CSR spenders through zero-coupon zero-principal bonds. These bonds will be listed on the SSE. They will carry a tenure equal to the duration of the project that is being funded, and at tenure, they will be written off the investee’s books.
The bond is suited to investors who are looking to create social impact but do not expect funds to be returned to them. However, such bonds are not without risk, as there is no guarantee that the social impact that the non-profit is promising will, in fact, be created, it cautioned.
Fund-raising options
FPEs can explore fund-raising through MFs and SVFs, which currently fall in the ambit of SEBI’s alternative investment fund (AIF) guidelines. SVFs have, so far, only been used for for-profit investments. However, SVFs can also function as grants-in, grants-out vehicles for charitable purposes, said the committee. Besides, they can also be used for impact bonds, especially where pooling of funders and engagement of multiple NPOs becomes necessary. CSR funds and foreign funds should be permitted to be deployed towards SVFs, it said.
MFs will operate as routine schemes, with the exception that the returns generated are channelled towards the financing of NPOs. The returns will be considered as donations made by the investors to NPOs. There are already a few examples of those operating currently, such as the Cancer Fund of HDFC MF. The objective would be to mainstream these structures by raising awareness.
While the idea is good, the SSE should have a clear definition of what constitutes a social cause and a socially responsible act. The definition should also be dynamic to accommodate events that may emerge, such as Covid-19, or cyclone, that would require area-specific funds.
Even already listed or unlisted companies that may need one-time investments for upgrading their equipment to meet pollution mandates or environmental guidelines should be allowed to raise funds through MFs/SVFs. The company may be asked to pay dividend back to the MF/SVF.
However, the success of SSE depends purely on interest from big institutions and high net worth individuals. The system should encourage them to participate easily. Another important player would be local level municipal authorities, which can act as both facilitators as well as fund-raisers. To attract a large number of small investors, the instrument should allow them to donate or invest in amounts as low as ₹1.
Beyond this, the Centre should also consider corporate investments as amounts spent under the CSR obligations.