Author: Arvind Agarwal, Founder & CEO - C4D Partners
Publication: India Today
With mighty targets of non-fossil energy, decarbonization and universal healthcare, there has been an influx of investors focusing on impact investing in India.
The outbreak of the Covid-19 pandemic has roused the world from its deep slumber of ignorance. Perhaps among the exacerbating effects of the crisis, if a silver lining was to be found, it was in the awareness towards social and environmental concerns.
For a long time, the majority of companies and investors have overlooked the unsung sectors of agriculture, clean energy, healthcare and education among others. But the catastrophic impact of Covid-19 has been an eye-opener that the society and environment we inhabit can no longer be ignored.
Impact Investing in India
With mighty targets of non-fossil energy, decarbonization and universal healthcare, there has been an influx of investors focusing on impact investing in India. For years, investors have been pouring money in conventional sectors working on risk and return models. Now, a tectonic shift is taking place as investors are tapping into the model of risk, return and impact. According to the Impact Investors Council (IIC), more than 600 enterprises affect over 500 million lives and attract over $9 billion in capital. However, bulk of this impact capital comes from high net-worth individuals, family offices or global foundations as philanthropic investments and the private capital continues to be pinned on conventional sectors instead of impact investing.
Challenges before India
India’s impact investment ecosystem is riddled with challenges and hurdles. Foremost is the absence of a standardized legal structure governing social enterprises or the social investors.
As a result, it has triggered higher costs of registration, compliance and cost of doing business which discourages potential investors from investing in impact sectors. Another roadblock is the lack of a considerate taxation system.
Social impact enterprises operate in the for-profit space and despite generating social outcomes, are taxed in the same manner as any other entity. This lack of tax concessions and exemptions deter private and domestic investors from deploying capital.
Another reason for the lack of private capital for the moderate returns and high impact model is the dearth of awareness surrounding impact investment and social enterprises among the native population.
The first step in order to boost India’s impact investing should be to create awareness and sensitize potential investors by conveying the ecosystem’s dynamics. In order to mobilize capital for impact investment, the government should raise awareness about registration norms, taxation protocols, larger impact, etc. By rectifying the lack of separate legal entities and including impact investing in educational curriculums, the government can help garner attention to the sector and attract investors.
Secondly, the government can introduce tax breaks and concessions for investors investing in for-profit social enterprises. To lure investors, these enterprises should also be made eligible for CSR funds and the restrictions on foreign funds should be relaxed.
Since, for-profit social enterprises complement the government’s efforts to redistribute wealth, resolve societal/environmental challenges and magnify social welfare, they should be allowed tax concessions.
Additionally, by rationalizing interest rates on debt for early-stage and growth enterprises the dearth of funding to social enterprises can be resolved. Appealing to the philanthropic side of the investors, the government can attract investors who will be willing to make high-risk and moderate-return investments. Consistent and concentrated efforts will help attract private capital and domestic investments in the impact investment ecosystem.
In recent few years, agriculture, education and healthcare have seen the highest number of investments by social impact investors. Impact investors have empowered these sectors to scale technological innovations and bring about a sustainable impact. Furthermore, impact investing also contributes to the Sustainable Development Goals (SDG) Index by providing social outcomes and reducing poverty and climate change.
India has made progress in sanitation, peace, justice and strong institutions and affordable and clean energy but a long road still needs to be vaulted before a consequential impact can be created. By exposing the broad spectrum of opportunities in the sector and raising awareness among potential investors, India can make a consequential impact and touch a billion lives.