Social Stock Exchange – A Lifeline for Social Enterprises

1. Introduction & Typology of Social Enterprises

Social Enterprises (SE) are organizations that pursue a social mission. Social Enterprise is more a matter of purpose than legal form. The two types of social enterprises include:

• For-Profit Social Enterprise (FPE): Includes Companies registered under the Companies Act (both Private Limited and Public Limited), Sole Proprietorships, Partnership Firms, Hindu Undivided Families (HUFs), and Limited Liability Partnerships (LLPs).
• Non-Profit Social Enterprise (NPO): Includes Section 8 companies, Trusts, and Societies.

Defourny and Nyssens (2010)¹ have provided four criteria that reflect the economic and entrepreneurial dimensions of social enterprises:

• A continuous activity producing goods and/or selling services
• A high degree of autonomy
• A significant level of economic risk
• A minimum amount of paid work.

Further, Defourny and Nyssens (2010) have also stated five indicators that encapsulate the social dimensions of such enterprises including:

• An explicit aim to benefit the community
• An initiative launched by a group of citizens
• A decision-making power not based on capital ownership
• A participatory nature, which involves various parties affected by the activity
• A limited profit distribution.

2. Social Stock Exchange and Prerequisites

Along with the ongoing financial crunch, the non-profits face another big challenge of lack of visibility to investors and donors. Social Stock Exchange (SSE) would give social enterprises much greater control over social and environmental missions, boost the availability of funding for scaling up operations, and create an ethical and transparent investment environment.

SSE is indeed a progressive step towards the socio-economic development in the country especially for achieving 13 SDGs (leaving out Goals 12, 13, 14 and 17) as prioritised by Niti Aayog² wherein a platform will be created for the social enterprises and the investors to come together.

The social enterprises have their unique needs which could be met with an enabling policy and regulatory environment, robust governance structures and measurable social impacts. The basic prerequisite for an SSE is the existence of social enterprises. Besides social enterprises an SSE would operate with:

• Investors/Donors: Investors could be impact investors, incubators, accelerators, corporations and crowd funders. Impact investors/ESG investors are those investors who invest with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. They evaluate investment avenues based on ESG parameters and/or ratings and are open to accepting below market rate financial returns. Incubators provide financial support and advice to entrepreneurs who want to develop and pilot their social impact ideas. Accelerators facilitate access to funding, provide mentoring and training, help refine business models and provide support for measurement of social impact. Crowd funders are those who provide small amounts of capital but are large in number, to finance a business venture via social media platform and websites.
• Intermediaries and other independent agencies: Some intermediaries, probably brokers, would facilitate sale and purchase of financial instruments. Other independent agencies/individuals namely, valuers, rating agencies, social impact assessors, information repositories, social auditors would also play an important role in running and functioning of SSE.
• Infrastructure:
  • Exchange platform – like the existing Bombay Stock Exchange and National Stock Exchange or in partnership with any one of them, with specific listing norms, trading rules, operational processes, reporting requirements and governance structures.
  • Legal framework – Appropriate laws pertaining to formation, listing, reporting and taxation along with the regulatory framework for SE to form and operate is needed wherein the formation and fund raising can be done as early as possible without bureaucratic hiccups. Also, investor protection norms and resolution mechanisms should be put in place.
  • Regulatory framework – Securities and Exchange Board of India (SEBI) / any other body would act as the regulatory authority for the SSE for the smooth functioning of the entire SSE ecosystem.

3. SEBI – Working Group on Social Stock Exchange

Securities and Exchange Board of India (SEBI) constituted a Working Group to review and recommend possible structures and mechanisms, within the securities market domain, to facilitate the raising of funds by social enterprises and voluntary organizations as well as associated regulatory framework inter-alia covering the issues relating to eligibility norms for participation, disclosures, listing, trading, oversight etc.

The Working Group Report³ on Social Stock Exchange defines SEs as a class or category of enterprises that are engaged in the business of “creating positive social impact”. They would provide a declaration stating their intent to create positive social impact, describing the nature of the impact they wish to create and reporting the impact that they have created. There will be an additional requirement for FPEs to conform to the assessment mechanism to be developed by SEBI. Both FPEs and NPOs will be subject to a common minimum standard of reporting social impact, and operating practices (governance and financial reporting).

While both FPEs and NPOs are concerned with social impact, the type of funding avenues open to them are fundamentally different given the nature of their legal structures and expectations of their “fund providers”. Specifically, FPEs can raise equity while NPOs cannot (except Section 8 companies). The report calls for direct listing of NPOs through the issuance of bonds, a range of funding mechanisms, pairing innovative instruments by which NPOs could associate with the SSE, a reporting standard that offers investors and donors a standardized framework for measuring social impact and Sector-level infrastructure institutions such as information repositories and social auditors.

Recommendations of SEBI Working Group Report on Social Stock Exchange

The recommendations of the group have been summarized below:

• Fundraising Instruments: Besides equity, debt and crowdfunding, instruments of fund-raising such as zero-coupon-zero-principal (ZCZP) bonds, social venture funds (SVFs) and mutual funds would provide a wide gamut of options to “donor” investors looking to invest with an objective to create a social impact as well as for corporates to deploy CSR funding by connecting directly with social organisations. ZCZP bond would be listed on SSE and works the same way as a donation providing the NGO both high visibility and credibility. SVFs work as “grants-in, grants-out” vehicles for charitable purposes under the SEBI’s Alternative Investment Fund (AIF) guidelines.
• Information Repositories (IRs): IRs will provide credible, standardised information about the NPOs. As of now, information of only a small fraction of all NPOs is available. The IRs would perform the functions of enumeration (listing of active NPOs and their activities), standardization (articulating a standard reporting format for NPOs and helping them to do information reporting), and verification (due diligence). This would build greater recognition and trust in the sector among funders and the community at large.
• Introducing Standard Reporting Norms and Impact Measurement for SE: Measuring social impact poses a huge challenge due to lack of a common currency for measurement, use of proxies often dilute focus on the beneficiary, no defined timescale, difficulties in attribution, and various unintended externalities.
• Common Minimum Standard for Reporting Social Impact: A common minimum standard for reporting social impact is proposed which comprises three sections:
  • Section 1: Strategic Intent and Goal Setting
  • Section 2: Social Impact Scorecard
  • Section 3: General information about members of governing body, prior funding history and financials, registrations/licenses.
  To begin with, Minimum Reporting Standard for the immediate term for SE interested to list on SSE has been proposed which would extend to limited third party verification by social auditors in the intermediate term and full third party verification by social auditors in the ideal end state.
• Outcomes-Oriented Measurement: A greater shift towards outcomes-oriented measurement in place of inputs and outputs-oriented measurement, especially for those NPOs that are looking to create social impact at longer horizons than a year is envisioned. With respect to impact measurements a clearer and more refined statements of intent to create social impact by SE is expected. SE would be subject to more rigorous assessments of the social impact that is being created (along the reach, depth and inclusion dimensions) and more graded evaluations would arise therefrom with more granular disclosures of governance mechanisms and financial operations. Presently Impact Reporting and Investment Standard (IRIS) Metrics and Global Impact Investing Rating System (GIIRS) Rating system is widely used. IRIS provides social and environmental impact indicators with standard definitions. GIIRS is based on IRIS definitions and rates organizations based on Governance, Community, Workers, Environment, Social and Environment Focused Business Models. Standardized metrics of social impact and standardized reporting frameworks are needed that would help SE to measure/quantify and report/disclose social impacts in a transparent and accountable manner.
• Social Auditors: Social auditors will perform an independent verification of impact reporting. While in the immediate term, NPOs need only self-reporting, from the intermediate term onwards, social auditors can take over this function.
• Capacity Building Fund: Operating the “capacity building fund” with an initial allocation of INR 100 crore for enhancing reporting capabilities by NPOs (particularly the smaller NPOs). Creating awareness and driving adoption of this fund among NPOs, philanthropists, and donors.

Other Essential Policy Interventions for the SSE Ecosystem

• Allow funding to NPOs on SSE to count towards CSR commitments of companies and authorizing the trading of CSR spends between companies with excess CSR spends and those with deficit CSR spends via the SSE platform.
• Notification of zero coupon zero principal (ZCZP) bond of NPOs as a security under Securities Contracts (Regulation) Act (SCRA).
• Enabling foreign entities to invest in SVFs listed on the SSE by clarifying rule 4 of the Foreign Contribution (Regulation) Rules (FCR Rules), 2011.
• Lowering of the minimum corpus requirement and minimum ticket size for SVFs. The current floors of INR 20 crores and INR 1 crore limit the participation of smaller outcome funders.
• Investors to get benefits which allow all investments in securities/instruments of NPOs listed on SSE to be tax deductible, and corporates to deduct CSR expenditure from their taxable income, among other things. Investment by companies will be considered as part of their Corporate Social Responsibility (CSR) initiatives. Allowing a tax holiday of 5 years to FPEs listed on the SSE, from the time of first listing and revenue generated by stock exchanges through SSE to be tax deductible.

4. Social Stock Exchange – Global Models (12 Global Benchmarks)

Across the world, several jurisdictions have experimented with social stock exchanges and social investment platforms. The key global models include:

5. Understanding Social Impact Measurement of Social Enterprises

All investments are made as per the risk, return and liquidity trade-offs. However, the investments by SE and impact investors are done weighing all of these factors as well the “Social impact”. Social impact is the positive change that SE has created or effected over time. According to a Social Enterprise East of England (SEEE) booklet on ‘Measuring making a difference’, social impact measurement is the process of providing ‘evidence that your organisation – whether it is a social enterprise, voluntary or community organisation or traditional business – is doing something that provides a real and tangible benefit to other people or the environment.’ (SEEE 2009)⁶. This change could be social, economic and/or environmental.

For SE creating positive social impact is at the heart of what they do and they need to identify, understand and capture the full value of the impact of their activities. It helps to know whether mission and vision is met or not. The benefits of impact measurement are many⁷. It facilitates not only knowing about the present impacts but also help for further putting the resources at the best use. Social impact assessment helps SE to plan better, work more effectively, and fruitfully build programs to scale. Knowing which activities are beneficial and bringing desired outcomes and which not is crucial.

Impact measurement is an extremely difficult challenge. Some impacts can be easily measured while some impacts are actually very difficult to measure/quantify. For example – How have a service changed lives? Since impacts vary across beneficiaries/ communities etc. it is difficult to end up to a meaningful assessment. Further, SE would measure and report on the impact they’re having, both now and in the future. To begin with measurement may be simple, easy but over time it becomes more and more complex.

Impact of an SE reflects the long-term changes for people, the environment or the economy that the SE creates or contributes to. An SE should also know about the impacts which could not be achieved as well as unexpected impacts (either positive or negative) of its activities.

Measuring Impact – Core Questions

Measuring impact is useful not only to prove the social impact but also holds SE accountable. It furthers helps SE to attract additional funding. To begin with thinking about the impact of one’s activities need answer to the following questions:

• Changes in the long term for people, the environment or the society that SE creates or contributes to?
• What are the most important things we need to know about? What desired impacts, if not achieved would stop from meeting the mission?
• Are there any unexpected impacts of the activities (either positive or negative)?
• Who do we need to tell and in what form do they need to know (e.g. disclosure and report, funding framework etc.)?

Prerequisites for Impact Assessment & Sequential Stages

To assess impacts certain prerequisites are warranted:

• Primacy of social/environmental mission and intent of SE: This articulates the primary reason for the existence of SE, that is, Positive Social Impact.
• Clear purpose and Theory of Change: This forms the basis for performance assessment in terms of output, outcome, and performance.
• Impact Performance Measurement and Monitoring Systems: Commitment to ongoing monitoring and evaluation of impact performance using clearly defined impact indicators for performance assessment and reporting.

The impact requirements follow multiple stages. The first stage is about mission and intent – specific and clearly stated positive social or environmental impact as the primary reason for the existence of the SE. The second stage is Clear purpose and the theory of change – this forms the basis of performance assessment to demonstrate output, outcomes, and social performance. The third stage is about Impact performance measurement and monitoring systems – commitment to ongoing monitoring and evaluation of impact performance using clearly defined impact indicators. Impact Reporting is the fourth stage – which calls for impact reports as per the reporting principles and requirements applicable to SE. The last stage is Independent Impact Certification by independent entities/bodies/assessors.

Stages of Impact Measurement

Impact measurement is nothing but the measure of benefits arising to the enterprise itself as well as its stakeholders. It is done in five stages⁸:

1. Planning: The planning stage includes understanding the use and management of resources that would most likely deliver the desired outcomes.
2. Engaging: At the engaging stage, stakeholders are engaged to identify benefitting stakeholders as well as recognise the nature of the benefit to them. This involves internal stakeholders like employees, management, volunteers, and trustees, present and past to learn together about the proposed intervention and share in the expectation of the value it can bring.
3. Setting relevant measures: The planned intervention and the outcomes and impacts it can deliver are matched to the stakeholders which will benefit to develop measures. This would help in planning the impact measurement and likely improvements needed for future.
4. Measure, validate and value: Helps internal and external parties focus their efforts on what will deliver the desired outcomes. It enables continuous improvement and draws parties together to support each other.
5. Report, learn and improve: Supports outreach, both in reaching more potential partners, beneficiaries, funders to enhance impacts.

6. Disclosure and Reporting – Social Accounts

Disclosures and accounts facilitate this assessment and when audited, can be published as a Social Report. Publishing the Social Report allows all stakeholders – those who benefit from what is done, those who do the work, those who pay for it, those who work in partnership – to understand the true nature of the enterprise achievements, developments and the differences made.

These disclosures and accounts are called Social Accounts. Social accounts are a rich source of information for use internally for strategic and business plans as well as externally to all stakeholders including funders and investors. In a way the enterprise involves stakeholders by providing a useful framework of all its activities and extends its accountability towards them.

Two types of disclosures are recommended for social enterprises in line with Impact Exchange Board Listing Guide⁹:

1. Continuous Disclosures: All material information to be immediately released for the benefit of stakeholders.
2. Periodic Disclosures: Reports at regular intervals:
   • Quarterly Financial Reports
   • Annual Financial Reports (Audited)
   • Half Yearly Impact Reports
   • Annual Impact Reports (Certified)
   • Annual Impact Certification of ongoing status as impact entity.

7. Social Impact Measurement Framework – Inputs to Impact Logic Chain

Social impact measurement seeks to identify and quantify the impacts of SE via an impact measurement framework¹⁰. The impact measurement framework provides the structure for assessing all aspects of an enterprise impact using multiple tools and/or methods to collect information. The enterprise intended results would be in the form of – Outputs, Outcomes and Impacts. The intended results would flow from Inputs and activities.

The measurement of inputs, activities, outputs, outcomes and impact is important because it focusses both on accountability as well as performance of SE. The various resources supplied are known as inputs. Inputs could be financial, intellectual, human or others. Inputs lead to concrete actions in the form of activities aimed at creating improvements – changes – in the lives of beneficiaries. Impacts vary from sector to geography to beneficiaries. Hence the measurement of impact requires an expert who can measure impact on some indicators. Standardized indicators like IRIS may also be used yet at times they might not fit well to the enterprise.

8. Social Audit & ICAI Technical Guide

Social audit is the audit of accounts of SE which increase their credibility in relation to the attainment of its purpose and goals. Social auditing is a process that allows a SE to evaluate and explain its social, economic, and environmental benefits. It is a way of measuring the extent to which the SE lives up to the shared values and objectives it has committed itself to. It provides an assessment of the impact of an SE’s non-financial objectives through systematic and regular monitoring based on the views of its stakeholders. A social audit helps to reduce gaps between vision and reality as well as between efficiency and effectiveness. Social auditing creates an impact upon governance. It values the voice of especially those stakeholders often whose voices are seldom heard.

Social Audit can be used to provide specific inputs for the following:

• To monitor social and ethical impact and performance of the SE
• To provide a basis for forming management strategy in a socially responsible and accountable way and to shape strategies
• To facilitate organisational learning on how to improve social performance
• To facilitate the strategic management of SE
• To inform the community, public, other organisations, and institutions about the allocation of their resources (time and money); this refers to issues of accountability, ethics (e.g., ethical investment) etc.

The Technical Guide on Social Audit¹¹ issued by ICAI provides that a good social audit carries the following essential characteristics:

• Improved Social Performance
• Multiple Stakeholder Perspective
• Comparability
• Comprehensiveness
• Regularity of Coverage
• Independent Verification
• Transparent Reporting

9. Expansive Opportunities for Chartered Accountants

There are various agencies engaged in the conduct of Social Audits in various scenarios. These could be independent agencies, accounting firms, or other types of organizations (including accredited agencies that fulfil certain qualification criteria). The Technical Guide on Social Audit issued by ICAI indicates that largely Social Audit is taken up by Civil Society organizations that follow their own standards and train their own auditors to conduct social audits under mandates from auditee organisations.

They can facilitate social audit processes for SE at all stages of their activities – right from the planning to the board level governance, to the basic systems to the reporting and disclosure processes. Besides, financial area expertise, expertise in the domain of impact assessment and measurement would be needed which spreads across various and rather all domains in which SE operates. Chartered Accountants would be expected to able to put communities’ interests first, have inquisitiveness coupled with a professional scepticism, ability to understand programmes/activities and their wider social context, follow a systematic approach to the Social Audit task and be unbiased and independent.

The newly constituted Sustainability Reporting Standards Board (SRSB) of ICAI is undertaking several initiatives to build capacity of chartered accountants in this emerging area.

10. Way Forward & Strategic Vision

If implemented, all the proposals on SSE could help the country lay a comprehensive foundation for social finance and boost the funding of this sector over the years to come. SSEs will be entitled to create a new set of regulations to distinguish social enterprises and impact investors, establish procedures to access social capital, standardize measurement of social impact and fix reporting requirements.

SSEs and all the stakeholders must collectively ensure that the social solutions are safe and sustainable. ICAI will play a major role in this area to meet the diverse requirements of the stakeholders. ███