Social Impact Investing in India- A Road Less Travelled

[Aashna Soman is a 5th-year B.A., LL.B. (Hons.) student at ILS Law College, Pune]

The concept of impact investing arose to fill the lack of public resources to fund development programs in financially poor countries. Impact Bonds (IBs”) are innovative financial instruments that pull private investment to finance high-impact social programs. The implementation of impact bonds aids in financing early childhood education, global health, and workforce development, including recidivism and employment. IBs are essentially of two kinds- Social Impact Bonds (“SIBs”) and Development Impact Bonds (“DIBs”). The DIB Model is a relatively new performance-based investment instrument used to finance development programs in low-resourced countries or developing countries. The DIB model is based on the Social Impact Bonds Model, in which a philanthropic organization is the outcome payerwho agrees to pay for the social outcomes that are achieved by a program, whereas in the SIB model, the government is the outcome payer. These bonds are outcome-oriented and contain a high element of risk. An analysis of early IBs indicates that most of them have returned the investments along with positive returns. The price of a DIB usually depends on the size, administrative cost, legal fees, and other costs associated with the project. Apart from these, there are several non-monetary costs like leadership in surveillance on management, supervising various activities, etc., which are taken up by the service provider. DIBs are particularly upcoming in recent times, to meet the UN’s Sustainable Development Goals (SDGs), which envisage the elimination of poverty and hunger by 2030. Although each impact bond follows a unique development path, four major stages have been identified- a feasibility study; structuring the deal; implementation; and evaluation and repayment. The importance of DIBs has understandably become paramount during the COVID-19 Pandemic. 

The Rise of Impact Bonds

The World’s first impact bond was introduced in Peterborough, a city in eastern England, aimed toward reducing reoffending. The bond was structured as a SIB since criminal justice was the focal point of the project. To achieve this, in 2010, Social Finance which is a not-for-profit organization in the UK raised £5 million from trusts and foundations. It funded the One Service, a non-profit organization designed to respond to the complex needs of offenders to help them break the cycle of reoffending. Owing to the success of the SIB, the Ministry of Justice of Peterborough announced that 17 investors within the Peterborough Social Impact Bond will receive a one-time payment representing their initial capital plus an amount that will represent a return of just over 3% per annum for the period of investment. Since the project was a success, about 138 impact bonds including Gyanshala and the Kaivalya Education Foundation have been contracted in India. As of 2021, 206 impact bonds have been undertaken in 35 countries across the World. The majority of the deals are present in just a few countries. Those in the U.K, the U.S, the Netherlands, Portugal, and Australia, make up 69% of the total number of Impact Bonds. This aggregates over $434.24 million in upfront investment in social services and $460 million in total outcome funding committed. 

The Structure of IBs in India

The DIB and SIB models are essentially the same, except that the outcome payer in a SIB is the government. The DIB model usually includes three parties- the private investors, the service providers, and outcome payers. A DIB creates a contract between private investors and service providers like non-profit organizations, by providing the required upfront working capital to achieve a specific social target. The service provider is a non-profit organization that is responsible for achieving the target set for the project. The structure includes a results-based finance mechanism, where the outcome funders will only pay for successful results. If the social outcomes are not fully achieved, funders will pay proportionately as per the results which are achieved. Given the dual interest of DIB investors in both social and financial returns, with most investors likely to be impact-first investors, especially in early DIBs, there will be a threshold to the quantum of returns that investors can expect. The growth of the investment and the impact created are also assessed by an evaluator, who prepares a report on the developments of the DIB model. The cost of the evaluationmay be paid directly to the outcome evaluator by the outcome funder. A performance manager is usually employed by service providers to keep track and make a report on the performance and risk associated with the project, which eventually aids in making thoughtful decisions and minimizes the risk factors. In some impact bonds like The Quality Education India Development Impact Bond,           evaluation and performance management data is regularly shared with non-profit partners. This permits them to be flexible and agile, using real-time data for productive decision making which contains adapting programs in the field and shifting funds within their budget to attain outcomes. 

Impact and Growth of IBs in India

The first DIB was launched in India in 2015, with the non-profit Educate Girls as the service provider, UBS Optimus Foundation as the investor, and Children’s Investment Fund Foundation as the outcome payer. UBS invested a total of USD 270,000. The entire project was managed and overlooked by Instiglio, who provided performance management services to Educate Girls, while IDinsight was the evaluator. The project was inclusive of 166 schools in 140 villages in the Bhilwara region, in Rajasthan. The final report by IDinsight claimed that the DIB surpassed both its targets, to increase enrolment of out-of-school girls and to increase learning outcomes in literacy and numeracy for children by 116 percent and 160 percent respectively.

The Quality Education India Development Impact Bond is the largest education DIB in the World, launched in 2018 with the Indian Government in Delhi and at the United Nations General Assembly in New York. The final results of the DIB will only be known in mid-2022. The key outcome funders for the impact bond include the British Asian Trust, the Michael & Susan Dell Foundation, and UBS Optimus Foundation. Other notable partners are Comic Relief, the UK Government’s Department for International Development, the Mittal Foundation, BT, the Lawrence Ellison Foundation, and Tata Trusts.

The Legal Framework for IBs in India

At present, there is no legal framework for the implementation of IBs. However, a parallel can be drawn between Public-Private Partnerships (PPPs”) and IBs. The International Monetary Fund defines a PPP as “the transfer to the private sector of investment projects that traditionally have been executed or financed by the public sector”. A PPP utilizes private sector investments and public sector capital to attain social goals benefitting the public. Investors can infuse capital in the form of equity holding in entities if they have been set up as “Social Venture Funds”. A Social Venture Fund is registered as a Category I Alternative Investment Fund (“AIF”) under the AIF Regulations, 2012. AIFs are regulated by SEBI. 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 attracting capital from either global or domestic investors. 

In 2014, India became the first country in the world to make Corporate Social Responsibility (“CSR”) contributions mandatory, through Section 135 and Schedule VII of the Companies Act, 2013 as well as the CSR Rules, 2014. CSR provides an additional source of capital to finance IB programs and the convergence of CSR and impact investing will benefit the investors, as well as the society as a whole. However, the impact funds will have to adhere to the country’s CSR guidelines and align with the activities which may be included by companies in their CSR Policies suggested by the Act. 


Impact investing is a relatively new model in India that is gaining traction in recent times. More awareness and guidance are needed on this front which will help investors and philanthropic organizations participate in such programs as there is still a lot of ambiguity related to the model. In order to leverage this further, the Government can form committees dedicated to these causes and help entities route CSR funds or other investments with a social objective towards Impact Bonds. Legal reforms and policy changes need to function in a more streamlined fashion to support impact investing in India. The productivity of Impact Bonds will multiply if private and public entities begin pooling their resources and direct them towards social impact investing. 

Aashna Soman

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