Budget 2019: Social Stock Exchange may see a chicken-and-egg scenario

Budget 2019: Social Stock Exchange may see a chicken-and-egg scenario

Finance Minister Nirmala Sitharaman’s announcement to create a social stock exchange could be path-breaking with a potential to make a huge impact for social enterprises, if executed well. In her Budget speech, the finance minister said: “It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion. I propose to initiate steps towards creating an electronic fund raising platform – a social stock exchange – under the regulatory ambit of Securities and Exchange Board of India (SEBI) for listing social enterprises and voluntary organisations working for the realisation of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund.”

Those in the impact investing space see it as a significant move. “It is crucial because social enterprises must be able to identify as a separate asset class and be able to attract the right kind of investor. Since many are small value transactions, you have to find a way to do it in a low cost manner,” says S Viswanatha Prasad, managing director, Caspian Advisors, a leading social impact investor. He feels, “it may take some time for it to gain traction because initially it will be a chicken-and-egg situation – should good enterprises come in first or should good investors show up first? But then, India being a vibrant social enterprise ecosystem, it will be successful.”

How vibrant could it be? He says, “Among growing emerging markets, India has maximum number of social enterprise start-ups. Currently, it is a challenge for many enterprises to raise funds because they need investors aligning with the thought of having such unique investments while also being focussed on financial returns. These investments are typically long-term to solve a particular social problem using markets, which may not interest mainstream investors and banks. In my estimate, all impact investors along with global players put together will only be funding about 100 enterprises a year while the demand could be about 10 times more.”

While Budget speech focussed on start-ups through measures such as setting up start up incubators, it also looked at affordable housing. Shifting the regulation from National Housing Bank (NHB) to the Reserve Bank of India (RBI) is significant because most seem to feel that a unified regulator for financial institutions is a good thing. In this case, the lender is not a regulator. However, this was originally done with good reasons. For, there was a time when we needed a specialised regulator for housing given its importance and given that earlier there was little access to long-term financing, but not anymore. Now, there are deeper markets and long-term financing options are available. There is a good chance that NHB may continue its role as a financier. All the long-term financing that the government gives may still get routed through NHB with regulations moving to RBI ensuring that the lender is not regulating.

The announcement on encouraging zero budget farming has also caught attention. However, it is unclear as to how the government will handhold farmers, what sort of incentives it will offer them in order to switch from the current system to zero-budget farming.