Impact Investing: India Today (part 2)

November 7, 2013 Posted by Investor Info

This is part 2 of a 4-part series titled Impact Investing Reaches a Tipping Point in India. In part 1 of this series, we elaborated on the emergence of impact investing as a new global asset class. In this part 2, we look at recent impact investing activity in India and the challenges and obstacles faced.

Rural Impact Through Impact Investing

In India today, there are many examples of companies placing their entire focus on the low-income rural population in India. One such example is Moksha Yug Access (MYA), a rural supply chain solutions company that aims to ensure livelihood enhancement of rural farmers by improving their productivity and market access. MYA has built a rural network that services more than 15,000 small farmers across 1,110 villages in the state of Karnataka. ‘Milk Route’ is their brand that provides benefits to both consumers and rural producers of milk by adopting better dairy farming techniques. This not only increases the value realization for farmers but also the nutrient content of the milk for the consumer. MYA growth is possible, in a large part, due to leading impact investors: Khosla Impact, Unitus Equity Fund, and Unitus Impact who have capitalized the venture.

Microfinance Institutions Have Led Impact Investing

Microfinance institutions (“MFIs”) pioneered the concept of using capital at scale for social good through providing affordable capital to micro-entrepreneurs. MFIs in India can be traced back to 1992 when the Self Help Group (SHG)-Bank linkage was formally launched by NABARD.  The SHGs were created and financed, first with philanthropic funds, then philanthropic-backed debt, then equity, then bank debt, then private equity, and finally public market funds including debt securitization.

SIDBI was one of the first institutions that identified and recognized MFIs as effective delivery channels. SKS Microfinance is another pioneer in this industry. Started in 1997, the firm is India’s publically listed MFI with an aim to provide small loans to as many of India’s rural poor as possible. BASIX is another stalwart of the Indian MFI industry. Known for its work in the rural livelihood sector; it was started with the aim of providing micro-credit to India’s poor.  Chennai-based Equitas, Kolkata-based Bandhan, and Bangalore-based Ujjivan Financial Services are other examples of MFIs which have successfully scaled.

Given the positive impact MFIs started to have on the lives of low-income families, financial capital started to flow to other sectors as well, including health, education, water and energy, which serve a basic necessity need of the BoP (see Business Standard, July 2013).

Obstacles to Impact Investing in India

According to research by Rockefeller Foundation, Impact investments in India attracted close to INR 550 crores in 2012 and are expected to grow at 30% per year. Private and angel investors have also sprung up over the past few years. These funding sources span the range of the venture – from early to growth and later stage. Lok Capital, Aavishkaar, Grassroots Business Fund, India Innovation Inclusion Fund (IIIF), Omnivore Capital, Elevar Equity, and Unitus Seed Fund are prominent Indian funds. Indian Angel Network and Mumbai Angels are some of the larger angel groups. More on the landscape from TechSangam, Oct 2011.

In addition to MFIs and impact investments, government involvement in development initiatives has been a staple. DFIs including IFC and others are effective government-sponsored investment vehicles. The National Skills Development Corporation (NSDC) is a good recent example of government involvement to ensure sustainable and scalable models in the field of vocational training and placements. NSDC is a Public-Private Partnership (PPP) owned by the government (49%) and the private sector (51%). It was started with an equity base of INR 10 crores and targets skilling/upskilling 50 crore people in India by 2022, mainly by fostering private sector initiatives. Gram Tarang, Babajob, iSTAR, and Caravan Crafts are examples of social businesses that NSDC has provided debt to.

Impact Investing Ecosystem

While there are many positives that can be enumerated, there are some obstacles that still need to be overcome in this space. As mentioned by Nisha Dutt, Director, Global Advisory Business, Intellecap, “India has a robust impact investing ecosystem that includes entrepreneurs, investors and enablers. Now it depends on how we make this ecosystem work effectively.” Key elements of a healthy ecosystem include:

  • Education and incubation resources
  • Earliest-stage (friends/family/grant) risk capital
  • Seed and growth capital
  • Investment banking and transactional support
  • Networks for business coordination and advocacy
  • Opportunities for exits – secondary sales and M&A

Currently, most of the impact investments in the country are from international capital. Given the regulations, foreign investors can only put in equity (vs. debt) into funds or directly into social businesses. In addition, the merits of social impact investing have not been marketed as effectively as they can be.  “If we are to believe this is a different asset class, then why it is different needs to be articulated. The trade-off with returns need to be offset with the kind of risks taken by these entrepreneurs, the new geographies penetrated by the enterprises and therefore, the social impact created by the venture.”, says Nisha Dutt. The end objective is to attract more domestic investors into the sector.  Unitus Seed Fund’s new Indian rupee-denominated fund will help in this regard.

USF Founding Investor, Mohandas Pai

USF Founding Investor, Mohandas Pai

Steps are being taken to make the impact investing arena more investor friendly. Firstly, leadership Indian domestic investors are just beginning to emerge. Mohandas Pai and Ranjan Pai have each committed INR 5 crores to impact funds or individual deals in 2013. Swaminathan Aiyar and Narayan Ramchandran are also pioneering domestic impact investors. We expect this trend to accelerate as investors see the value of having both a financial and social impact return.

Secondly, funding is beginning to flow back into the venture debt sector. IntelleGrow raised INR 10 crores from The Michael and Susan Dell Foundation earlier this year. The MFI sector is also on the uptake with many private equity firms and development agencies investing in this space. For example, in September 2012, Bangalore-based Ujjivan Financial Services raised INR 45 crores ($7.2 million USD) of equity capital from IFC (see Business Standard, Nov 2012).

Thirdly, an India Impact Investors Council has been set up that aims to serve as a self-regulatory initiative to provide more information, standards and transparency for impact investing in the India context. This council comprises of nine members of the industry including Aavishkaar, Omidyar Network, Elevar Equity, and Unilazer Ventures. The expectation from this industry body will be to collaborate to provide a unified view of the space and the impact being made. Finally, new regulations could be game changers. For example, the SEBI has recently approved the creation of Alternate Investment Funds (AIF) which include ‘Social Venture Funds’. AIFs are funds established in India for the purpose of pooling capital from Indian and foreign investors for investing as per a pre-decided social impact policy. Looking forward, if the New Companies Act of 2013 were to make for-profit impact investments and impact funds to also be recipients of the 2% profits mandated for CSR activities of profit making companies, it would dramatically accelerate the growth of impact investing from domestic sources.

Going forward, the question that still remains is whether impact investment opportunities will truly capture the interest of the Indian financial investing community. In the next part of the series, we will discuss the concept of ‘Fueling Change via Impact Investing in India. Read part 3 of the series >

Read the full Impact Investing Series >

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