National Stock Exchange (NSE) building in Mumbai.
Reuters Photo
In an emerging market like India, social enterprises — which can be both for-profit and non-profit organisations — have a crucial role to play in bridging the gap between the public and private sectors by attending to societal needs in areas that are frequently disregarded under the excuse that they are unprofitable or impractical.
In India, the broad scope of social enterprises encompasses diverse sectors including education, healthcare, financing, non-governmental organisations (NGOs), and charitable trusts. Even as social enterprises retain relevance both politically and economically, there are twin challenges confronting them — capital deficiency and information asymmetry. To that extent, the conception and implementation of the Social Stock Exchange (SSE) — the first of its kind — needs to be not only embraced, but also celebrated.
The SSE, which operates on the National Stock Exchange (NSE) platform, gives socially-conscious organisations the much-needed boost they need by offering an effective means of raising capital while guaranteeing informational transparency and disclosure that benefits investors and other stakeholders.
On March 14, two firms listed their NPOs on the SSE, taking the total number of SSE listings to five. These five firms, which represent education, skill development, and vocational training, among others, together have raised capital worth Rs 8 crore so far.
Unlike private sector enterprises driven on the back of commercial motivation, social enterprises embrace their existence with an overarching goal of serving the interests of society even if profitability retains a lesser degree of relevance. The Companies Act, 2013, which requires private companies to set aside a minimum of 2 per cent of profits for corporate social responsibility (CSR) initiatives has seen both listed and unlisted private companies make notable efforts to address societal needs.
Without casting aspersions on the intended objectives of private enterprises engaging in CSR, there is sufficient empirical evidence to associate ‘empire building’ as the primary motivation. Empire building is leveraging CSR activities for branding and promotion purposes to gain commercial benefits either through revenue generation (indirectly) or cost savings arising from tax benefits. In this context, the role of social enterprises assumes significance.
The SSE should be welcomed as social enterprises have an opportunity to raise capital efficiently providing a fillip to expand the scope and scale of operations. Social enterprises have traditionally relied on private capital, benevolent contributions, and concessional loans to meet their capital requirements. Except benevolent contributions, almost all other forms of capital carry high costs either explicitly evident in interest/profit rates or implicitly in the form of informational asymmetry. The latter, more often than not, assumes the form of ‘obligations’ imposed on social enterprises to reciprocate in some way to the suppliers of capital.
The SSE, on the other hand, offers several benefits for social enterprises looking to utilise the platform. First, social enterprises have an opportunity to diversify their source of capital by raising funds at competitive costs from investors. Investors in this instance tend to be socially conscious looking to earn profits with purpose.
With sustainability acquiring significance, social enterprises can demonstrably embrace it by earmarking a portion of the capital towards the implementation of novel practices. Investment in the installation of solar panels with an intended goal of reducing energy costs as well as reducing the carbon footprint are some of the initiatives to exhibit sustainable practices.
With accounting regulatory bodies such as the National Financial Reporting Authority (NFRA) actively examining mechanisms to mandate reporting on ESG (Environmental, Social and Governance) and SDG (Sustainable Development Goals) by Indian corporations, sustainable practices — often relegated as off-balance sheet items — would have a direct impact on the profitability. Here, social enterprises embracing an SSE platform carry a first-mover advantage to disclose sustainability both in letter and spirit.
Through disclosure of relevant information, social enterprises can significantly reduce informational asymmetry while simultaneously gaining attention from bigger investors looking at investment in sustainably- driven social enterprises.
As the SSE model is the first of its kind, regulators and market participants must disseminate sufficient knowledge and information on the benefits associated with the platform as success in India would inevitably set a benchmark on best governance practices for social enterprises for the rest of the world to emulate.
(Ullas Rao is Assistant Professor of Finance, EBS Dubai. X: @Ullasrao7.)