Ishaan Nag – My diary of the human society.

Hedge funds, stock markets and the world of finance and trading is generally associated with glamorous selfishness, and those who partake in them are often stereotyped in movies as greedy snakes. In the meantime, however, it is often forgotten that money is merely a means to an end, and that end could be charitable too.

Charities are voluntary contributions to just causes. Charity has an intrinsic value in and of itself, but humanity is not intrinsically inclined to these causes, because most of us are egoistic rather than altruistic regardless of outliers. People need incentives to act, and that’s okay. There are millions of Non Profit Organizations and people around the world who are dedicated to these causes and know how to solve complex problems, which most of us don’t have the ability to, but the intention. Sometimes all that is needed is a little bit of extra support, be it in the form of commodities, time, or finances. The latter part is particularly worth exploring.  

Many countries possess very well known tax benefit policies for contribution to charities, such as tax deductibles as benefits for donors contributing to 501(c ) organizations in the US, and tax benefits for  gains from assets held by charitable trusts in India. If more than 85 % of income of trusts or charities are not applied, that income can be accumulated and hence, tax exempt. Yet even more intriguing than government ensured rules and policies is the free market’s own ability to support good causes.

The Indian finance minster 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”.  This is  the Social Stock Exchange, an initiative to connect the stock exchange system with Non Profit organizations, facilitating them to raise money from donors without explicit door-to-door requests to them. The Indian securities regulator SEBI has permitted the Bombay Stock Exchange to set up this social stock exchange, wherein organizations with a motive to do good can raise funds. Charitable ‘trading’ through the SSE is also more beneficial for the donor as it has more tax benefits than direct donation.

The way in which the SSE works is through the issuance of Zero Coupon Zero Principal Bonds by participating charities. These are bonds issued to, or loans given by the donor to the charities, which, however, do not gain interest yield. Moreover, the principal amount is not paid back to the donor either. Since the audits regarding this exchange goes public like the normal stock exchange, we know that the funds are used for the right purposes.  

Some mutual funds such as HDFC Charity Fund for Cancer Cure also work in a way similar to ZCZP Bonds. Like normal mutual funds, they are invested a principal amount by donors, which gain assets tax-free. However, the interest is paid only to charitable organizations of the donor’s choice, while the principal is paid back to the donor after 3 years. Moreover, some organizations which are not quite NPOs but raise funds for charitable causes, known as For Profit Social Enterprises (FPSEs) could also be listed in the SSE. These FPSEs can raise capital in exchange for equity. Profits generated through this trade can be reinvested into supporting their just cause. Investors need not necessarily deem monetary returns as the prime reason for investing in FPSEs as they are investing for a social cause anyways, and thus may be willing to invest in these organizations regardless of potential returns.

One of the biggest issues which prevent people from donating is the information asymmetry arising from monetary exchange between donors and charities. There is a lack of transparency regarding where and how money is spent, and thus a lack of accountability, deterring people from donating to charities which are not very well-known. This situation can be improved through the Social Stock Exchange as finances are automatically audited under the guidelines and watchful eye of the SEBI, thus increasing transparency and trust.

However, challenges exist with this system. India is not the first to initiate the SSE, and other countries such as Brazil have done so in the past to, only to be rendered insignificant. This is due to the lack of scalability. Smaller charities have limited access to the SSE, hence losing out on raising more funds for a good cause. Democratization for NPOs to access funds has not been carried out fully, and that thorn must be plucked for a truly effective SSE, to truly prove that the glamorous world of stocks and funds can be used as a means to good ends.