According to neoclassical economics, narrow self-interest drives economic behaviour. Empirical literature, however, demonstrates behaviour motivated by fairness, cooperation, reciprocity, etc. representing a deviation from pure selfish interests. Mainstream investments focus on the rate of return catering to those motivated by narrow self-interest. However, there are those who aspire for their investments to bring about positive social or environmental change without necessarily expecting a market rate of return. Such investments are referred to as impact investments. More formally, as defined by the Monitor Institute, impact investments involve “making investments that create social and environmental value as well as financial return.”
In the contemporary world which has understood the value of pursuing the sustainability principle in general, social impact investments are being aligned to the achievement of Sustainable Development Goals. As suggested by the UN estimates achieving the SDGs by the year 2030 demands that developing nations invest as much as USD 3.9 trillion annually. However, the private and public sectors together invest only USD 1.4 trillion. This amounts to an investment gap of USD 2.5 trillion. The social impact investments are expected to fill this gap.
The impact investment paradigm in India is led by names such as Aavishkaar group, Omidyar network, Elevar Equity, Unitus ventures, Acumen and so on. Although Impact investments in India are relatively nascent, they are steadily gaining currency and appear to demonstrate bright prospects as well. The interplay between the scope for economic growth as well as social advancement on the one hand, and robust financial markets, on the other, has provided the impetus for growth of impact investments in India. The aggregate assets in impact investments between 2010 and 2016 in India were US$5.2 billion, of which US$1.1 billion was invested in 2016 alone. Financial inclusion recorded a dominant share of about 43 percent in the total impact investment deals, while clean energy, agriculture and education accounted for 21 percent, 13 percent, and five percent, respectively in 2016. However, in 2018, the situation has completely transformed with agriculture and education assuming the lead with about 67 percent of impact investors putting their money in these sectors, with energy and microfinance seeing about 33 percent and 25 percent, respectively of impact investors investing in them.
In India, total Assets Under Management (AUM) lie anywhere between USD 0.15 million and USD 88.97 million. About half of the impact investors in India have made investments exceeding USD 20 million, of which 75 percent have been in the form of equity, 17 percent exclusively in the form of debt and 8 percent in debt, equity and blended instruments. Endowment funds (USD 5.5 million), Development Finance Institutions (USD 5.3 million) and Banks (USD 4.6 million) primarily have made impact investments in India. About 67 percent of the investors in India earn a return greater than 15 percent, eight percent receive about 10-15 percent, while the remaining quarter makes about five to 10 percent.
Impact investments are made in social enterprises mainly located in Western and Southern India. The venture approach represents the business model which popularly sources impact investments. The thesis underlying such investment is to put money at initial stages in for-profit entities in markets that serve the vulnerable, weaker and underserved sections of the society; the intent being to showcase their investible capacity and make available mainstream capital for these entities. However, mainstream investors have made investments in a big way at early stages and the first round in the venture initiatives, blurring the difference between them and the impact investors.
Given where India stands in terms of its SDGs, impact investment can play a substantive role in in India’s sustainable development story. However, there are many challenges to the impact investment landscape in India. The most significant challenge is the lack of a legal definition of social enterprises in India. There is a need to assign legal status to social enterprises in a way that speaks to the realities of this space and the context in which social enterprises operate. Furthermore, there are several conflicting laws which govern different forms of social enterprises in India. Such conflicts need to be solved by harmonising the various laws that govern entities which operate as social enterprises in the country.
As social enterprises are not recognised as separate legal entities, there is no standardised legal structure that oversees their functioning. As such, social enterprises incur significant costs in terms of registration, compliance, seeking of approvals etc. A large-scale regulatory platform that acts a one-stop shop for compliance, registration, incorporation, and all forms of approval for social enterprises needs to be set up. Impact investments are at a nascent stage in India. In this context, self-regulation is suitable for monitoring of performance. Harmonisation of performance standards demands generalisation which might be not be accurately possible at this point.
Those registering as a not-for-profit enjoy tax benefits under the Income Tax Act 1961. Social enterprises functioning as for-profits cannot avail this benefit. The tax regime in India does not distinguish between for-profits with a social mission as against those without such a mission. Currently, both entities are being taxed in the same manner. For-profit social enterprises with a social mission actually support the government’s endeavours in bringing about social welfare. Social enterprises are focussed on achieving the SDGs. This fact must be considered by the existing tax regime while levying taxes on for-profit enterprises.
The regulations around receiving philanthropic and foreign funds are unfavourable. There is a need for the government to allow tax breaks on grants and donations made to for-profit social enterprises at the early/growth stage of operations, make for-profit enterprises eligible for CSR and relax foreign fund guidelines.
Depending exclusively on the government sector in achieving the SDGs by 2030 is putting too much pressure on the state machinery. The government must contemplate on boosting impact investment initiatives in India as a quick-win alternative. Measures required to solve challenges faced by the impact investment sector in India demand that the government should take certain decisive steps. This will empower the impact investment sector to complement the government in reaching the SDG milestones in time.
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Renita DSouza is a PhD in Economics and was a Fellow at Observer Research Foundation Mumbai under the Inclusive Growth and SDGs programme. Her research ...
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