India can boost social impact investing

A stock exchange is meant to create an ecosystem for trading investment instruments. The participants in the exchange make profits (or losses) by betting on a particular investment in the hope of it providing a better return. It is an important institution in the for-profit world providing feedback on how firms are perceived on their capacity to generate returns.

Now, India has announced its intent to bring this well-established, market-based concept to the nascent world of social impact investing. In the previous Union budget, finance minister Nirmala Sitharaman proposed the idea of setting up a social stock exchange (SSE). This was followed up by the Securities and Exchange Board of India (Sebi), which set up a working group to look into the idea. That report has now been put up in the public domain and has been available for feedback and comments. With the time for submitting feedback having been extended twice, the current deadline is 15 August.

In this backdrop, it may be important to take a deeper look at the idea and the issues around the idea. As of 2017, McKinsey estimated that the cumulative investments in the social sector (impact investments) stood at $5.2 billion. This is an emerging area, where funds operating on market principles are possibly crowding out the old-fashioned grants for projects of social intervention.


The prevailing system of stock exchanges, rating agencies, analysts and the ecosystem around the markets measure and interpret primarily one thing—the returns generated on investments. Is this idea worth replicating in the social world? Can it be replicated where ‘purpose’ is ahead of profits?

Both commercial and social enterprises require a scarce resource: Capital. While the commercial enterprise promises a unifocal reward of generating returns on capital, the returns that a social enterprise promises are necessarily social, working towards greater equity, and a more just and sustainable world. How can we apply the principles of a market to enterprises that are supposed to correct the failure of the market system and deal with problems created by markets, which tend to promote and rely on self-interested behaviour?

The idea of creating a market has a natural, instinctive appeal but carries a paradox. The strongest supporters of markets agree that markets have contributed towards economic inequality, environmental degradation, the weakening of communities and, as the current pandemic reminds us, fragile public systems—the root causes of many of the challenging social problems we encounter. So, with these limitations, can we bring market instruments judiciously to tackle social problems; identify and support organisations that negotiate the tensions of generating profits, especially when ‘purpose’ is placed at a higher pedestal?

Distinguishing social firms

India is not the first country to be experimenting with the idea of an SSE. Attempts have been made in Brazil (BOVESPA), Canada, Portugal, Singapore, South Africa (SASIX) and the United Kingdom. While the idea is much extolled, there is surprisingly little information on how it has actually worked. From what is available publicly, the privately-run Impact Investment Exchange (Asia) (IIX), based out of Singapore, is a “crowdfunding platform" which has issued debt under a series called Women’s Livelihood Bonds.


Likewise, the Oxford-based Ethex, run by a small non-profit organisation, has been described as a “model for understanding that social stock exchanges are feasible with the will of philanthropy, for a limited segment offering limited services and certainly not going as far as being regulated like a traditional stock exchange."

Empirically, the idea of SSE has failed or at best functioned in ways not different from existing platforms and that too at small scale. This does not foreclose a possibility of future success but points to the need for more critical thinking.

Defining social enterprises is tricky, but regulations rest on definitions, measurements, compliance and verification. Structuring an enterprise on the market system and adding a label “social" on top does not suffice. We need a sharper distinction. The signals and commitments under a distinct regulatory oversight allow the enterprises an entry in sensitive domains and the ability to avail tax benefits.

For instance, the not-for-profit organisations (NPOs) are legally prevented from distributing any “residual earnings" to contributors of capital. In voluntarily tying their hands up, they signal their commitment to their purpose over promoters’ financial interest. In the case of a social business—a concept being popularised by Bangladeshi social entrepreneur Muhammad Yunus—the signalling is in the form of the promoters not taking anything out of the enterprise beyond the nominal value of investments and a one-time premium of 20% without consideration of the time value of money.

Cooperatives the world over move away from the primacy of capital towards “patronage" or usage of the critical service. The capital is rewarded on a pre-contracted basis and is not treated as resources that gets residues. This is similar to interest payment on debt instruments.

The Community Interest Companies (CIC) in the UK similarly set a limit on the share of profits that can be redistributed to shareholders, hardcoding a balance between competing interests.

The most significant intervention in trying to create a distinct ecosystem for differentiated enterprises is by B Labs which is working on a new form of incorporation as a Benefit Corporation (B-Corp). This experiment creates an elaborate system of incorporation and certification of a B-Corp. Several states in the US have passed the B-Corp law and provide tax benefits.

There is a legislative and regulatory framework defining a B-Corp, an architecture for measuring performance and certification. Even as this system evolves, there are problems. The pre-defined B-Corps migrate and list as regular enterprises and give up their certification. The initial commitments made to the purpose are not valid any longer and raise questions about mission drift.

The Sebi attempt

In the Indian context, the Sebi working group report on SSE has created a buzz. Ideally, the SSE should standardize information, create a better ecosystem and bring in more funds into the social sector. The report offers NPOs and for-profit enterprises (FPEs) a platform to list themselves as social enterprises in a “market" that promotes social impact. The potential benefits include access to financial instruments and tax incentives.

The report moves the conversation on the social sector ahead, but does not recognize the tensions and fails to suggest adequate checks and balances. The SSE conceived by the report is more a registry than an exchange. The details for a constructive engagement are absent, leaving the role of Sebi itself ambiguous. For instance, the report advises against the “immediate creation of a regulator for social enterprises, for social reporting, or for social auditors"(p.24). Other regulatory dimensions are vague, creating regulatory arbitrage and legitimising profiteering in social sectors. This platform need not create the next “unicorn" but should facilitate long-term sticky investments that create social and public value.