Finance minister Nirmala Sitharaman's announcement to create a social stock exchange is being seen as a path-breaking step with a potential to make a huge impact, if executed well. She 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 this is as a significant move. "It is crucial because social enterprises must be able to identify as a separate kind of 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. "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."
Among the growing emerging markets, India has the maximum number of social enterprise start-ups, says Prasad. Currently, it is a challenge for many enterprises to raise funds because they need investors who are aligned with the need for such unique investments while also being focussed on financial returns. These investments are typically long term and are aimed at solving a particular social problem using markets, which may not interest mainstream investors and banks. "In my estimate, the impact investors put together - about 10 of them operate in India, including global players - on an annual basis may be funding about 100 enterprises while the demand would be about 10 times more."
While the Budget speech focussed on start-ups through measures such as setting up incubators, it also mentioned a major shift likely in the housing sector. Shifting the regulation from National Housing Bank (NHB) to the Reserve Bank of India (RBI) is significant because many feel that a unified regulator for financial institutions is a good thing and in this case the lender is not a regulator. However, there was a time when there was a need for a specialised regulator for housing since there was little access to long-term financing. This is not the case anymore. Now, there are deeper markets and long-term financing options are available. While the fine print needs to be seen, there is a good chance that NHB may continue its role as a financier as all the long-term financing that the government gives may still get be routed through it, and the regulation moves to RBI. This will ensure that the lender is not the regulator.