Allowing CSR is required for the Indian Social Stock Exchange to succeed… …or is it ?

Sounds like clickbait, doesn’t it ? You know like “THIS ONE WEIRD TRICK WILL CHANGE YOUR LIFE!!”, but I am hoping that you find more substance in what follows than what followed that headline.

It’s a topic that comes up in every SSE related event that I have attended. Used to be the Trinity of missing provisions, namely, 80G, CSR and FCRA, and a lot of time and energy being spent upon discussions that focussed on how the Trinity was mandatory for the SSE to succeed. With 80G being allowed, its one down two to go, right ?

With regard to FCRA, in almost every forum that I have spoken on, I have maintained that the SSE is the ideal platform for ensuring transparency relating to end use of funds with the regular reporting the periodic independent Social Impact Assessment. Hence it should become THE platform for channelling FCRA funds. But, it’s a chicken and egg situation, with the SSE needing to demonstrate stability and probity, before the government would allow FCRA.

So, we shall reserve FCRA for a later episode, and spend time on discussing CSR.

BTW, the objective of this article is to kick off a discussion on this subject, rather than providing a definitive conclusion for the topic.

Let us start by spending some time on the raison d'être for the SSE. Why is it important for the Indian Social Development ecosystem ? And then we will weave CSR into the story.

Some of the most common advantages mentioned in this regard are as follows :

1. Creating transparency and accountability of fund utilisation and impact – just like I mentioned in relation to the brief discussion on FCRA above. This also has an added benefit of providing greater visibility to the track record and impact being created by social enterprises – regardless of their size, thereby providing a level playing field for fund raising for them.

2. Opening up additional channels for funds – As an example, the SSE enables retail participation at scale in funding social development and the nation-wide reach of the stock exchanges enables donors/investors in any part of India to invest in a sector of their choice in any part of the country. Once FCRA is enabled, it will allow global donors also to participate.

3. Enabling innovation in the Fund-raising and Project implementation space – Traditionally, social enterprises rely on donations, grants, and philanthropy, and in case of For-profit enterprises, Social Impact investors.  SSE provides a regulated platform to raise capital through equity, debt, social impact bonds, social impact funds etc. etc... The SSE provides an excellent architecture for enabling collaboration between all sorts of combinations of social enterprises, both for profit and not for profit. It enables large scale participation in multi-party financing options such as Blended Finance. And the list can go on and on…

4. Providing liquidity to Social Development sector investments through trading – The key word here being “investments”, as pure donations (e.g. ZCZP) cannot be traded as of now as there is no intrinsic value that can be bought or sold. Apart from Equity and Debt, instruments such as Social Impact Bonds and Social Impact Funds can conceivably be traded, unlocking liquidity in these investments and therefore allowing a much wider pool of investors to participate.

Not an exhaustive list, but I think it captures the key ones.

So, what does all of this have to do with CSR on the SSE, you may ask ? Hold onto your horses for few more seconds, will ya.

Let us now go over these advantages in the reverse order and see how CSR fits in, before we discuss CSR and SSE from other viewpoints. And, of course, there is the matter of the regulatory chains that CSR is bound in currently that do not permit a lot of flexibility – and we’ll touch upon that, although I feel that may deserve a whole separate discussion. Again, will touch upon this where relevant.

Ok, so let us begin…

4. Liquidity – Hmmm, interesting one. Prima Facie, this should have no relevance to CSR, ne c’est pas ? After all, liquidity implies there is value being traded and CSR donations do not have any value, except for the social impact they create, and we cannot trade social impact, can we ? To be honest, without some serious restructuring of the CSR paradigm, its hard to see any role that CSR can play in enhancing liquidity (trading) on the platform. Remember, we are not covering paradigm restructuring in the unshackling of CSR, that is left for a separate discussion.

While clearly permitting CSR funds to be donated on SSE will increase the pool of available funds on SSE, which is covered separately in this article, without making CSR eligible for Social Development investment and not just Social Development grants, CSR will have no impact on liquidity on the SSE, using the current structures. However, if we can figure out a way for trading social impact, then it will be a completely different story, did I hear someone say carbon credits !!

3. Innovation – This is an open field, with limits drawn only by our imagination and the rule of law, of course ! CSR can play a critical role here, as an outcome funder in an SIB/DIB, or as the entity supplying development finance in a Blended finance instrument. CSR can act as a market maker for new kinds of instruments that include philanthropic capital as a means of finance. There are loads of possibilities about the role CSR can play in Social Development finance innovation, provided the right regulatory environment exists, and CSR is not being used for gap funding in the Government’s favourite schemes.

2. Additional Channel of funds – This is not applicable as CSR has already become an extremely important channel of funding for NGOs. To the extent that at an SSE seminar organised by ICAI in Delhi couple of years ago, where I was a speaker, I was told by a reasonably prominent NGO that they write proposals based on what the CSR donor needs, which evinced a slightly sharp response from me !

1. Transparency and Accountability – When we started the SSE journey in 2019, in my idealistic mind, transparency and accountability were the biggest reasons why any company would want to route their CSR funds through the SSE. And, I still maintain that for donor/investor, the SSE provides the perfect platform for selection of credible organisations, with a published track record, anywhere in India. Furthermore, periodic standardised reporting, with validation by an independent Social Impact Assessor, will allow the donor/investor to monitor the utilisation and impact of their money (impact being used loosely here).

However, this transparency and accountability also comes with some anonymity, as multiple donors, large and small, can contribute to a particular issue. This, I’ve been told, does not sit well with some CSR donors, who prefer the publicity that accompanies their donations, for them and their organisations.

Further, I have also heard, that too much transparency and accountability regarding Implementation Agencies and their projects that a CSR is partnering with, could get the CSR committee to raise uncomfortable questions regarding the efficacy of the funds deployed.

I do believe that these misgivings are from a minority of CSR donors and the majority will welcome the move to allow CSR funds to flow via the SSE, for the reasons mentioned above.

So far, I’d say, it’s a mixed bag as to whether CSR will benefit from or provide benefit to the SSE from CSR being allowed on it. Let us now move on to discussing three additional criteria, which in my mind, are as important as what we have discussed above.

A. Credibility – If large and reputed Corporates choose to donate their CSR funds to projects listed on the SSE, this will obviously provide a boost to the projects and the organisations implementing the projects. After all, the Corporates would give their CSR Funds to deserving organisations and impactful projects. Also, equally importantly, it will boost the credibility of the SSE ecosystem as a whole and inspire more philanthropic capital to flow through it.

B. Market Making – The participation of large and reputed Corporates on the SSE in projects on the SSE can serve the purpose of being an anchor investor for the project. While, “Market making” implies trading traditionally, I am taking the liberty of extending the meaning to creating an environment for an issue to receive more subscriptions. In a related role, Corporates can also at as “Gap funders”, thereby ensuring that issues on the SSE receive the minimum subscription required.

C. CSR Regulations – The current CSR regulatory environment, especially after the convoluted regulations that came into force from 2021, is not very suitable for the SSE. I am certain that as the Government is mulling over permitting CSR on the SSE, this aspect is front and centre. Without there being some changes in this aspect, CSR will have a very limited participation on the SSE and therefore all the above arguments regarding Innovation and Credibility and Market Making would have little relevance.

In summary, permitting CSR on the SSE will be a very good thing, for the Social Development ecosystem and for the SSE, provided the CSR Funds are subject to regulations that are more amenable to a Stock Exchange environment. A roll back of some of the regulations introduced in 2021-22 will be required for CSR to have a meaningful impact on the SSE. Just enabling CSR on SSE without the concomitant regulatory changes will not do the trick.

One  final note, one of the reasons I had been excited about the introduction of the SSE had been the prospect of NGOs being able to access additional channels of funding, especially with some of the more innovative instruments the SSE would enable.

The NGO world in India has over the last few years adapted themselves to the whims and fancies of CSR heads and their committees, and to an extent, justifiably so as foreign funding and Government schemes have reduced tremendously. It represents the low hanging fruit for NGOs to pluck.

I do hope that Social Enterprises look beyond CSR as they establish their track records on the SSE and raise funds through new instruments and new channels.

Hope you enjoyed reading this article as much as I enjoyed writing it. Would love to hear your thoughts, comments and criticisms.

Cheers,

Hemant