Social Stock Exchange should allow listing of producer companies

This will make it possible for them to raise funds from socially-minded investors and lenders and enable them to grow their business operations

In her FY 2019-20 budget speech, the finance minister proposed establishing a Social Stock Exchange (SSE) in India. The stock exchange is intended to enable social enterprises with a clear social purpose to raise funds from multiple sources. These social enterprises can either be non-profit organisations or for-profit enterprises with a declared intent to create, measure and report social impact.

According to the Securities and Exchange Board of India (SEBI) 's Working Group and Technical Group reports released in June 2020 and May 2021, respectively, the SSE would offer multiple funding instruments and structures for social enterprises. These include, among others, equity and debt funds (individual or pooled) and pay-for-success structured products (such as Development Impact Bonds). The stock exchange is expected to attract impact investors (including international development finance institutions) who seek both commercial and social returns and philanthropies, foundations, CSR (corporate social responsibility) funds, retail and commercial investors.

This is a welcome development as social enterprises struggle to raise funds, gain visibility and establish credibility with investors. Listing on SSE will enable social enterprises to gain access to new categories of investors, which they may not reach otherwise.

However, there is one significant omission in SEBI reports, namely, of producer companies from the kinds of organisations considered for-profit social enterprises. The Government of India enabled registration of producer companies starting 2003, under the Producer Companies Act (under The Companies Act). The Companies Act defines producers companies as enterprises of producers engaged in agricultural and allied activities, handloom products and other handicraft industries. These companies engage in supporting production and enabling processing and marketing of their members' produce. They are expected to improve the livelihoods of small producers by providing a platform for collectivising small producers, aggregating their produce, enabling pooling of funds, and improving their bargaining power within markets.

Over the past 6-7 years, the Centre has made a concerted effort to support these producer companies. In fact, in the same Union budget speech of FY 2019-20, the finance minister announced a scheme for "Formation and Promotion of 10,000 Farmer Producer Organisations (FPOs)"; with an outlay of Rs 6,866 crore over nine years. While FPOs can be registered as cooperatives and societies, producer companies are the most popular form of registration.

The NABARD (National Bank for Agriculture and Rural Development), one of the nodal agencies for implementing the scheme, has promoted about 4000 producer companies. More than 85 per cent of shareholders are small and marginal producers. In addition, a large number of producer companies have been promoted by philanthropies and CSR organisations. As of March 2021, a study by the authors found approximately 16,000 producer companies registered with the Ministry of Corporate Affairs.

However, most producer companies face severe capital and credit shortages, which prevent them from starting or growing their business operations. Their median paid-up capital is only about Rs 1 lakh which is substantially lower than the desired level of Rs 15-20 lakh in equity and debt needed by early-stage producer companies to start their operations (per a NABARD estimate). While the government has introduced several schemes to address the equity and debt needs of producer companies, very few producer companies are able to avail the benefits of these schemes due to their inability to meet eligibility requirements. Also, many commercial banks and financial institutions are hesitant to lend to producer companies due to risks inherent in agricultural businesses.

As enterprises that can only have primary producers as shareholders (mostly small and marginal farmers), producer companies are excellent examples of for-profit enterprises driven by commercial objectives with a clear social commitment. Therefore, it would be imperative to include them explicitly as a category of social enterprises allowed to list on the upcoming SSE.

Producer companies already meet the eligibility requirements specified in Section 2 of SEBI Technical Group Report, including "promoting livelihoods for rural and urban poor, including enhancing income of small and marginal farmers and workers in the non-farm sector". They also meet the criteria of having more than 67 per cent of their revenues, expenditures and beneficiaries aligning to the specific social purpose and measurable impact. However, since they are not specifically mentioned as examples of social enterprises, they are likely to get excluded from listing on SSE due to ambiguity in the rules.

Listing on the Social Stock Exchange would allow these companies to access additional sources of funds, which will somewhat level the playing field for these companies of small producers as they compete in markets with large, well-financed corporations.

Therefore, the SEBI should explicitly include producer companies in the definition of for-profit enterprises that are allowed to list on the Social Stock Exchange. The SEBI should also consider modifying some eligibility criteria for small producer companies (e.g. reducing the minimum turnover requirement from Rs. 50 lakh to Rs. 20 lakh) if all other criteria are met.

In summary, producer companies are inherently for-profit enterprises with a social purpose, driven by both social and commercial imperatives. They are important vehicles for improving the incomes and livelihoods of small producers. Although the government has launched many schemes to support them, they continue to face capital and debt gaps. Allowing producer companies to list on the Social Stock Exchange will make it possible for them to raise funds from socially-minded investors and lenders and enable them to grow their business operations.

(Annapurna Neti and Richa Govil are faculty members at Azim Premji University. This article is based on their ongoing study of producer companies in India)