The Securities and Exchange Board of India’s (SEBI) recently introduced social stock exchange (SSE) regulations have significant potential to not only unlock domestic capital but also attract foreign funds into For Profit Social Enterprises (FPSEs). However, several open questions still remain.
A thriving deals market requires a highly conducive demand and supply environment ably supported by a strong regulatory system. However, according to a 2020 International Finance Corporation (IFC) report, “Investing for Impact: The Global Impact Investing Market 2020, impact investing continues to be niche at $2 trillion i.e. 2% of total Global Assets Under Management (AUM) with India being at a miniscule $590 million.
To mainstream impact investing, alignment of both supply and demand side of incentives is required, which is beginning to happen. On the supply side, there is rising interest to invest in such business models driven by greater appreciation, especially post COVID-19, due to factors such as climate change, social inequality, and sustainable economy. On the demand side, thanks to technological breakthroughs unique business models that are driving positive societal impact, are beginning to scale.
The problems to scale however are manifold. First, there is the absence of a comprehensive regulatory framework to provide confidence to the market. Two, given the experience, there has also been raging debate around the true impact of ESG funds. Third, even within impact investing, while Global Impact Investing Network (GIIN) has put in significant efforts in standardizing and harmonizing metrics, these are still without any regulatory backing.
This is therefore where the opportunity lies. The recent Sustainable Finance Disclosure Requirements (SFDR) requires Article 8 and Article 9 funds to provide additional disclosure requirements to support their assertions around environment and social related goals. Globally there are several legal structures that have been introduced to meet impact related objectives. Some of them are listed below –
- Community Interest Company – CIC (United Kingdom)[1] – In the UK, CICs can be formed as a company limited by shares or guarantee with additional requirements and variations such as asset lock.
- Low-Profit Limited Liability – L3Cs (United States of America)[2] – L3C was created to indicate to the stakeholders that in case of conflict between mission and profit, mission would always win. (
- Benefit Corporations (BCs) (United States of America)[3] – BCs differ from other for-profit enterprises, in that regulations clearly provide that the fiduciary duties of directors of BCs are much broader than just the shareholders. BCs are required to focus on creating ‘general public benefit’ and are allowed to identify one or more specific public benefit purposes from a non-exhaustive list.
- Flexible purpose corporations (FPCs) (United States of America)[4] – This structure arose in California in 2011, as an alternative to BCs. FPCs have more restricted purposes like not-for-profits, and unlike BCs, there is no requirement of third-party evaluation.
In addition, one of the most common corporate certifications indicating sustainability intent is B corp certification. B corps are similar to BCs (discussed above) except that they can take any form of legal structure. B Corps have seen rapid growth over the last 5 years with the total no. of B Corp certified enterprises at approx. 5000, currently[5]. Despite the global efforts, the issue with some of these structures is their inherent restrictions that often result in lack of investors’ interest. Further they fail to stand out in absence of any public markets related framework.
The recently introduced social stock exchange related regulations by SEBI however have the potential to address such limitations. SEBI has now introduced a new funding vehicle namely, Social Impact Funds (SIF) and that can invest in for profit social enterprises (FPSEs).
SIF replaces the social venture fund (SVF) that existed as Category 1 Alternative Investment Fund (AIF) under the SEBI regulations. SVFs, unfortunately, could not scale up, as evidenced by the fact that to date only INR 2,100 crores have been raised (as at June 2022) and only 30% of this amount has been deployed[6]. One of the major reasons for such a meager performance was the definition of SVF that included requirement for investors to receive restricted or muted returns. The new regulation has now done away with this requirement.
SIFs can invest in FPSEs that clearly establish their social intent by fulfilling the following conditions –
(i) Primary engagement in one of the 16 thematic areas (including eradicating poverty, environmental sustainability etc.)
(ii) Target underserved or less privileged population segments or regions
(iii) Meet a min. 67% threshold of serving such target population either as customers or as beneficiaries
SIF’s exit route for respective FPSEs include a typical secondary sale or listing on one of the existing exchanges i.e. main board, SME platform or innovators growth platform. If listed, the FPSE will have ‘S’ as a scrip identifier. However, it will have to comply with requirements as provided in the new SSE regulations including submission of annual impact report. Impact report will include aspects such as strategic intent, planning, governance, impact score etc. and it will be required to be audited by a qualified social auditor.
We hope that these regulations will provide significant boost to the Indian impact investing industry. We also hope that this may be the beginning of standardization of at least the foundational impact measurement and reporting metrics. However, several open questions still remain –
- Social intent – The terms underserved and less privileged, that are central to FPSEs, have not been defined. Further, clarification is needed with regards to FPSEs that are focused on environmental sustainability as any business models that addresses climate mitigation or adaptation may not necessarily meet the thresholds relating to target underserved populations
- Industry specific Impact reporting – In addition to the foundational elements of impact reporting, industry specific impact reporting (e.g. Waste vs Water) will be needed to minimize the risk of impact washing as well as increase credibility of FPSEs.
- Foreign investment in SIFs – Clarifications w.r.t to the applicability of FCRA to Social Impact funds will be critical to ensure the investment by foreign investors in these instruments is seamless.
- SIF related disclosure requirements – Clarification is needed regarding SIF’s annual disclosure and reporting
- CSR Regulations – It remains to be seen if CSR related regulations are amended to enable CSR investments into SIFs. If allowed, this may have the potential to develop a blended financing market
- Tax incentives –The SSE framework report touched upon potential to provide tax incentives to FPSEs w.r.t. capital gain tax as well as five-year tax holidays. We hope adequate amendments are introduced in the tax laws to incentivize investments in FPSEs.
There has been growing demand for India to develop its own impact related frameworks since global frameworks cannot be applied blindly given the unique circumstances of our country. The SSE regulations is a great step in this regard.
Sources Referenced :
1 Source: Informdirect.co.uk -Article- Advantages and disadvantages of a community interest company (CIC) May 30 2018, Accessed on 22 September 2022
2 Source: Wolterskluver.com- Article – What Is an L3C (Low-Profit Limited Liability Company): An Entity for Entrepreneurs Who Value Purpose and Profits March 30, 2022, Accessed on 22 September 2022
3 Source: Benefit Corporations.net – Article – Benefit Corporations. Accessed on September 22 2022
4 Source: Hansonbridgett.com, Article – Flexible Purpose Corporation vs. Benefit Corporation, Accessed on September 22 2022
5 Source: B Corporation.net -Article – Celebrating 5,000 B Corps, Accessed on September 22, 2022,
6 Source: SEBI.gov.in, Database- Data relating to activities of Alternative Investment Funds (AIFs), Accessed on September 22, 2022
Authored by
Vivek Gupta, Partner and Head, M&A and PE Tax, KPMG in India
Devang Bhandari, Partner, Deal Advisory & Strategy, KPMG Global Services Private Limited
