Insights on Impact Investment

Ramraj Pai in conversation with Archit Kansal share insights on impact investment and it’s India perspective.

Ramraj Pai
Impact Investors Council
Archit Kansal /swissnex India

About Impact Investment

1. What is impact investing? How is it different from regular investment?

Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals. The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.

While the regular investments are driven by the motive of risk and returns, there is also a responsibility of doing a social good (and creating positive social impact) in impact investing. As per the IIC’s definition, these three components are a prerequisite for impact investing

INTENTIONALITY: It has the achievement of measurable, positive social impact as a primary objective under its memorandum and articles of association

SECTORAL FOCUS: It carries on a business or activities in the areas of agriculture, affordable healthcare, affordable education, affordable housing, financial inclusion, renewable energy, water and sanitation, livelihoods, or any other area as may be notified by the Government for priority sector lending, but does not carry on business in the areas of Real estate other than affordable housing, Infrastructure,

BENEFICIARY FOCUS: It invests primarily in promoting the social welfare of, or to, specified Beneficiaries, who may act as producers, consumers, suppliers or employees in relation to the Social Enterprise. For the purpose of this provision, Specified Beneficiaries shall be persons with annual household incomes of less than INR 3,00,000 (Indian Rupees Three Lakhs Only), or be individuals with physical disabilities and must comprise at least 67% of all Beneficiaries in the Social Enterprise or Investee Company.

2. Typically who can make impact investments in India?

High Net-worth Individuals and their family offices, Foreign Family Foundations through their Program related investments and Mission related investments, Impact funds (set up by way of AIFs) including pension funds, sovereign wealth, and Social Venture funds; Angel Investors and Funding platforms Indian foundations and charities, as per the Indian regulations cannot engage in any sort of investing activity which generates returns, hence they are excluded.

3. Are there any regulations on foreign entities surrounding impact investing?

Regulations on impact investing would depend upon the instruments used for impact investing. Regulations governing FDI, FPIs, FVCI such as Foreign Exchange Management Act, 1999 Companies Act, 2013, SEBI Act and Income-tax Act are some of the important statutes governing regulations

4. How is impact measured in this environment?

Most of the impact impacting funds use either some of the internationally accepted frameworks for measuring impact like IRIS + (Global Impact Investing Network), IMP (Impact Management Project), GIIRS or their own proprietary frameworks or a mix of the two. While the world has moved over from output based metrics (counting number of people /lives impacted) to outcome based metrics, In India we are somewhere in between. Not all the impact investors are measuring impact based on the outcomes achieved but are measuring the impact created.

India Impact Investment Climate

1. Who are the major impact investors in India?

Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals. In India there is a broad spectrum of impact investors where on one extreme end you have international family foundations (with return expectation of below market returns and patient capital depending on their PRI/ MRI objectives) and on the other extreme end, there are the domestic home grown PE/ VC kind of investors with return expectation equivalent to that of market returns. With different objectives of impact first or returns first, there exist different kind of investors within these two extremes. The names of some of the top few investors in India are Michael and Susan Dell Foundation, Omidyar Network, Aavishkar Venture Management Services, Elevar Equity, Omnivore, Ankur Capital, Menterra, Northern Arc Capital, Caspian Impact Investment Advisors, SBI-Neev funds, Grey Matters Capital, Unitus impact and many more.

2. What are the major challenges that investors face?

Access to capital is the biggest challenge for the impact investors in the country, till date more than 90 percent of the capital invested in the sector comes from the International sources. Out of the foreign investors also a big proportion comes from the Foreign Family Foundations and the DFIs. The asset owners’ do not have access to other classes of investors like sovereign funds, pension funds etc which are new to India. The domestic sources of capital have been limited because of lack of awareness by the Domestic asset owners and some of the regulatory limitations for domestic foundations and charities.

3. Is there a government impetus in Impact investing?

At this point of time, there are no specific government schemes exclusively available for impact investors or impact investing.

4. What are the different sectors that are considered Impact Investments?

The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as agriculture, skill and employability, waste management, renewable energy (last mile connectivity), microfinance, and affordable and accessible basic services including housing, healthcare, and education.

4.1 What are the minimum criteria for any investor to be considered an impact investor

The Alternative Investment Fund may raise funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units. Further, under AIF regulations a social venture capital fund needs to invest at least 75% of its assets in businesses which have a positive impact on society. For social venture funds, investments should also be subject to conditions as prescribed under reg. 10 of AIF Regulations, 2012.

4.2 Are these rules different for a foreign investor? If so, what are the differences?

Under AIF regulations, funds may be raised from any investor whether Indian, foreign or non- resident Indians by way of issue of units.

4.3 What are the primary reasons why investors are looking at impact investing? Is it only to meet CSR/SDG/ESG goals? How is it changing?

  • As per the current CSR regulation, CSR funds can only be given away as grants and not used in any form of investing activity. Hence, so far the CSR funds cannot be invested in Impact Investing.
  • ESG and SRI are the terminologies recently evolving. While the world over, there are many regulations around it, India still has not made ESG or SRI investing compulsory for the funds. Having said that, ESG and SRI are certainly prompting commercial investors (PE/ VC) to consider Impact Investing as an option and allowing for mainstreaming of impact.
  • SDG is also an evolving terminology and most of the funds have now started aligning their portfolios to the SDG goals.
  • Traditionally, impact investors have been the early stage investors in impact enterprises and the motivating reasons for them are based on the intentionality to create positive social impact.

About Impact Investor Council

1. When IIC formed and what are its key goals?

Impact Investors Council (IIC), represents a strong and cohesive Industry body committed to increasing the flow of impact capital to India. It also aims to contribute to the growth of the industry by building knowledge resources, focusing on impact measurement & standardization, research & policy support and self-regulation in the Industry. The raison d’être of IIC is to increase the flow of impact capital to social enterprises thereby addressing the needs of the 600 million underprivileged citizens of India. IIC was incorporated on 19 December, 2014 and 12AA and 80G Certified Company to address the growing sentiment among stakeholders to promote impact Investing and enlarge the impact investment community. IIC today has the support of close to 45 members and partners which are either Impact funds or Ecosystem builders. IIC‘s biennial event Prabhav positioned as an LP-GP forum is highly regarded as a ‘go-to’ event for international investors interested in India.

There is an urgent need to raise the profile and knowledge about Indian impact investing and thereby deepening the ecosystem. Early success stories have underscored the capacity of the sector to absorb capital and deploy it successfully to solving the problems for poor at the Bottom of the Pyramid. Notwithstanding this and despite its great potential and size, the country receives only 5% of global Impact capital flows as compared to 15% received by Latin America (Source : GIIN global investor survey) The investor base currently investing in the sector is narrow and restricted to a set of few international DFIs and asset management firms. The domestic investor base is negligible and has limited knowledge about impact investing and is therefore practically non-existent. Information about

Key Goals of IIC :

India is one of the most promising markets for impact investments globally. A potent combination of frugal innovation, a vibrant entrepreneurial ecosystem and a large base of low income customers has propelled Indian impact investing to the forefront globally. What makes the India story unique is its capacity for a variety of interventions right from seed capital in nascent companies to large ticket investments in organizations with proven business models moving towards large scale impact. This provides ample opportunities for commercial returns, large scale impact and everything in between. the sector is patchy and insufficient providing a disproportionate advantage towards larger and better resourced investors in the space. There is a strong need to Enhance the Impact Investing Ecosystem in India through a three pronged approach

a) Building Narrative to showcase the true potential of Indian Impact Investing: India lacks a distinct narrative and imagery around its place in the impact world, notwithstanding a broader idea that the country has made impressive strides in being able to marry innovation, impact and financial returns. A crucial element of significantly increasing interest in India (and thereby capital flows) would be to build a strong narrative around how technology, innovation and financial acumen are combining to solve critical problems in the country. IIC has been working on a structured engagement led by a professional brand and communications specialist who would work with IIC members, social enterprises and other stakeholders, to create an aligned view of the India impact story. Clarity and alignment with this vision will enable the entire industry to speak in one voice, and present a larger and more compelling imperative for investors about the India impact story whether in India or outside.

b)  Increase Advocacy & Outreach to Key stakeholders: A narrative is only as good as the people it reaches. There is a strong need to Increase the sector’s exposure to domestic and International Asset Owners (LPs) with a structured outreach program. We intend to work with investment specialists in the domestic and international investor markets. The initial work will include segmenting and targeting the right set of prospective Investors. This will be followed by structured outreach programs (discussions forums, small group sessions and so on) both in India as well as key global financial capitals to enhance investor understanding about Indian Impact Investing thereby increasing their propensity to invest in the sector. The third element would be to execute around an “India Impact Showcase”, essentially an India grass route tour with visits to social enterprises, GP visits and so on where investors can get a flavour of the on ground work being done.

c)  Strengthen Research & Publications at IIC: The last element of our agenda is to build a strong and credible repository of information and analytics around Indian impact investing. The industry is growing at a steady pace, but there is very little structured information around various elements of the ecosystem available in one place and in an easy to use format. Interested stakeholders have to painstakingly collate information from a variety of sources to understand the sector and its players in greater detail. There is an urgent need for discussion and debate around a wide variety of similar issues, and for this reason, IIC is keen to set up an in-house research and publication practice. This will increase the level of understanding about the sector and will propel the current and prospective investors to sharpen their perspective about India and embolden them to consider investing in it.

We strongly believe that our three pronged plan of action will help in strengthening the identity of Indian Impact Investing, will increase the level of understanding about the sector and will propel the current and prospective investors to sharpen their perspective about India and embolden them to consider investing in it.

2. How can Swiss Impact Investment community engage with IIC?

The impact investment sector offers opportunities where large scale innovative solutions to challenging social problems are being commercialised. The Swiss impact community by engaging with IIC can understand the sector better, engage with fund manager and impact enterprises, and evaluate potential opportunities for mutual benefit. IIC will be happy to facilitate a structured agenda to help Swiss investors familiarise themselves with the impact ecosystem in the country including road shows, meetings with impact funds, social enterprises visits and so on (virtual or physical depending on the requirement).