Photo: Bloomberg
Photo: Bloomberg

CSR may fund social impact bonds

Minister of state for finance Jayant Sinha says social impact bonds have proven to be very successful around the world

New Delhi: The social sector is forever looking for new ways to raise capital to address social inequalities. One way to do this is to adopt an impact investing approach and create social impact bonds that can provide the much-needed capital.

These bonds raise money from private investors for social enterprises and charities and, in turn, produce savings for the government and measurable social benefits.

“Social impact bonds have proven to be very successful around the world," minister of state for finance Jayant Sinha said.

Sinha indicated that impact investing in India is an important concept as the government is trying to develop products and services for the base of the pyramid. He pointed out that it is equally important to develop markets for these products.

Global Impact Investing Network defines impact investments as those which are made into organizations and funds to generate social and environmental impact alongside a financial return.

Impact Investors Council, the national association of all social impact venture capitalists, along with Ronald Cohen, founding-chairman of Big Society Capital, Portland Trust and Bridges Ventures, suggested that corporate social responsibility (CSR) funds can be invested in the so-called social impact bonds. The government said it will look at this innovative measure after assessing the existing laws.

“These bonds will be a financial innovation that we could ask CSR money as well as philanthropists to take a look at. It would be a very, very powerful and compelling initiative to look at some of these outcome-oriented funds set up around the world. It will be a notable innovation in India as well to tackle some of our large social problems," said Sinha adding that the government would have to examine the CSR regulation to see to what extent it needs to be modified to allow this.

The CSR rules require companies with a net worth of 500 crore or revenue of 1,000 crore or net profit of 5 crore to spend 2% of their average profit in the past three years on social development-related activities listed in Schedule VII of the rules. These rules, and those governing the non-for-profit sector, currently do not allow for any financial gains.

Sinha said that investors looking to invest in such sectors also have the option of investing in alternative investment funds, or AIFs. An AIF is a privately pooled investment fund and can be either a venture capital fund, or a private equity fund or a hedge fund.

“We have completely opened up AIFs. Any impact investment fund can be established as category 1 AIF and can attract capital from both domestic and global investors. We are willing to engage with the impact investment community at any time if they have more ideas," he said.

Category-1 AIFs are those funds that have a positive spillover effects on the economy and may get concessions or incentives from the government or the capital markets regulator. Their investments could be in start-ups, social ventures or infrastructure, or small and medium enterprises.

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