Connecting SR and social stock exchange

Source: The post is based on the article “Connecting SR and social stock exchange- Allowing social stock exchanges to facilitate (SR funding of projects could catalyse change by improving outcomes” published in “Business standard” on 31st August 2023.

Syllabus: GS2- Development processes and the development industry the role of NGOs, SHGs, various groups and associations, donors, charities, institutional and other stakeholders & GS4- corporate governance

News: The author talks about combining India’s corporate social responsibility (CSR) spending with the social stock exchange (SSE) to improve the impact of CSR investments. They mention challenges like regional imbalances and the inclusion of smaller non-profits.

What is CSR?

Corporate Social Responsibility (CSR) is a legal obligation for certain companies in India to allocate a portion of their profits towards socially beneficial activities. These activities are meant to have a positive impact on society, the environment, and local communities.

Current Status of CSR in India:

India has a unique stance, making it mandatory for specific companies to spend on CSR activities.

This is governed by Section 135 of the Indian Companies Act, 2013.

As per recent data from the Ministry of Corporate Affairs (MCA), companies in India spent ₹25,933 crore on CSR in FY22.

What are the challenges in current CSR spending?

Regional Imbalance: CSR spending is concentrated in a few states, neglecting others, especially the northeastern regions.

Planning and Execution: There’s a lack of professional planning and broad scattering of funds across various sectors.

Capacity Constraints: Companies with smaller CSR budgets face difficulties in implementing meaningful projects.

What is the Social Stock Exchange (SSE)?

Purpose: SSE is designed for eligible non-profit organizations (NPOs) to raise funds.

Instruments: SSE offers innovative financial instruments such as:

1. ZCZPs: Zero coupon zero principal mechanisms issued by NPOs promising social returns.
2. SIFs: Social impact funds investing in both NPOs and for-profit social ventures.
3. DIBs: Development impact bonds wherein grants are given to NPOs based on achieved social metrics.

Regulatory Framework: SEBI has set disclosure and reporting norms for participants in the SSE.

How can SSE and CSR be integrated?

CSR Funds in SSE Instruments: Companies can channel their CSR funds into SSE instruments like ZCZPs and SIFs.

Outcome Funders: Corporations can act as “outcome funders” in Development Impact Bonds (DIBs), rewarding NPOs for achieving set social metrics.

Escrow Account for CSR Capital: CSR funds can be held in escrow accounts until NPOs achieve project outcomes.

Trading CSR Credits: Companies could trade CSR spends on the SSE, allowing some to meet their CSR commitments by buying credits from others that exceed their mandated spending.

SSE Facilitation: The SSE can help streamline CSR funding for impactful projects.

What challenges exist for integrating CSR and SSE?

Challenges in Integrating CSR and SSE:

Local Preference Dilemma: Current laws, specifically Section 135 of the Act, mandate companies to prioritize local areas for CSR activities. Pooling funds on SSE might not align with this local focus.

Crowding Out Smaller NPOs: As more CSR funds might be channeled towards prominent NPOs listed on the SSE, smaller entities could get overshadowed, limiting their access to essential funding.

SIF and ZCZP Constraints: When pooling CSR funds in Social Impact Funds or investing in ZCZPs, ensuring adherence to the local preference mandate can be a challenge.

Duration Constraints: Using CSR funds in DIB structures would necessitate locking in the capital for several years, until NPOs materialize their project outcomes.

Legal Adjustments: To ensure a seamless integration of CSR and SSE, tweaks in the existing laws might be required.

What should be done?

Facilitate CSR in SSE: The government should enable companies to use the SSE for CSR funding of projects.

Revise Local Preference: Adjust laws regarding the local preference mandate to accommodate pooling of funds on SSE.

Protect Smaller NPOs: Set a ceiling on CSR funds directed towards larger NPOs on the SSE to ensure smaller entities aren’t overshadowed.

Introduce Robust Systems: Implement systems to identify credible NPOs for efficient investment of CSR funds.

Allow CSR Credit Trading: Permit companies to trade CSR credits on the SSE to fulfill their commitments.