Harnessing Social Stock Exchange for Farmer Producer Organisations

Farmer Producer Organisations (FPOs) are collective entities formed by farmers to pool resources, share knowledge, and engage in collective action. They play a crucial role in empowering farmers, promoting sustainable practices, and addressing the challenges of fragmented landholdings. However, the growth of the FPO ecosystem has stagnated due to challenges related to capacity, leadership, governance, business skills, the enabling ecosystem, and undercapitalisation. Further, the current financing options available to FPOs in India are limited and insufficient, leading to a funding gap that hinders their growth and impact. Challenges such as low paid-up capital from farmers, high interest rates from Non-Banking Financial Companies (NBFC), difficulties in obtaining bank loans due to collateral and credit history requirements, and legal barriers restricting external equity funding, contribute to these limitations.

In addition to the challenges related to accessing formal financial institutions, FPOs have not been able to access investments directly from impact investors, the philanthropic ecosystem or private capital sources. While impact investors are increasingly interested in supporting sustainable agricultural practices and rural development, they do not have any direct channel to finance FPOs.

The establishment of a Social Stock Exchange (SSE) in India holds the potential to revolutionise the funding landscape for FPOs. FPOs in India, driven by both social and commercial imperatives, have strong potential to register and get listed on the SSE. These FPOs inherently fulfil the eligibility requirements outlined in the Securities and Exchange Board of India (SEBI) Technical Group Report, as they promote livelihoods for the rural and urban poor and have a significant portion of their revenues, expenditures, and beneficiaries within the target sectors. Listing on the SSE would provide FPOs with an opportunity to access additional sources of funds, addressing the severe capital and credit shortages they often face. By facilitating the listing of FPOs on the SSE, these organisations can gain access to previously inaccessible capital to scale their business activities, levelling the playing field and allowing them to compete more effectively in the market. Additionally, SSE can enhance transparency, align incentives, institutionalise reporting mechanisms and improve the reputation and bankability of FPOs.

While FPOs have a clear social intent and target underserved populations, making them eligible for listing on the SSE, they may face five key hurdles that could impede their participation. These include:

1. Ambiguity in SSE rules regarding FPOs’ eligibility due to lack of explicit mention of FPOs as For-Profit Enterprises (FPEs), despite them fundamentally being FPEs.
2. Unsuitability of existing financial instruments on the SSE for FPOs as existing instruments are primarily designed for non-profits (NPOs) and for-profit social enterprises.
3. Ineligibility for the Capacity Building Fund (CBF), hindering FPOs’ readiness for SSE listing.
4. Challenges in demonstrating financial viability and sustainability due to narrow profit margins, high operational costs, and social trade-offs.
5. Limited resources for impact reporting, impeding FPOs’ ability to meet SSE’s reporting standards.

Opening up the SSE for FPOs will require orchestrating efforts among multiple stakeholders and enabling them to come together to form an enabling ecosystem for FPO financing. Going forward, there are six key factors that need to be considered to enable FPOs on the SSE.

To foster the growth of FPOs while ensuring the protection of farmer ownership, it is worth considering the exploration of equity financing options through platforms like the SSE. By allowing private equity investments, subject to appropriate safeguards such as non-voting shares and limitations on external control, and by implementing necessary legal amendments in the FPO policy, we can significantly bolster the financial position of FPOs enabling them to venture beyond farm income and explore off-farm income as well in the long-term.

Please note: This is a live document and will be updated as and when there are new developments.

Authors: Aparna Bhaumik, Piyush Agarwal, Palagati Lekhya Reddy, Vikramjeet Sharma, and Kriti Jain.