Financing for Social Enterprises in India

Financing for Social Enterprises in India

Financing for Social Enterprises in India
- Muskaan Gupta 

(Incoming BCG employee, XLRI Jamshedpur, SRCC) 

While “Mirakle Couriers” is about empowering the hearing impaired, ”Goonj” is the story about aiding disaster-hit people with clothes. “Akshaya Patra” is an emotional story of serving meals to the homeless. All of these social enterprises are making noise across the world for their good work and growing scale. India today hones more than 2 million social enterprises with according to the Impact Investors Council (IIC), around 600 impact enterprises in India now affect 500 million lives [1].
A social enterprise refers to a business with certain social objectives as its primary goal while using a commercial structure to run the organization. In simple terms, it is a hybrid structure of commercial and non-profit organizations. Like any corporate, profit generation is still extremely important to social enterprises, as earnings are important to sustain the livelihood of the venture but the important difference is that instead of using its profit to distribute among shareholders as dividends, the profits are used to reinvest in the enterprise to help it achieve its social mission. Many also confuse them with charities but unlike charities, they pursue tasks and endeavors like selling goods and services to boost their revenues to fund social objectives. [2]
Every social challenge that the country is currently facing is intrinsically linked to people’s livelihoods. By supporting social benefit organizations and entrepreneurial energy through investments, philanthropic funding, working with them, and capacitating them, we have the potential to solve, and focus on addressing India’s long-standing livelihood crisis
While the idea of economic systems incorporating social good with ‘social enterprise thinking’ is very new, the basis for more inclusive societies can be traced back millennia. This is perhaps best exemplified by the fact that the world’s most popular religions attempt to codify it into their belief systems. In Christianity, Jesus demonstrated acts of service, in Islam, Muhammad encouraged waqf (charitable endowments), in Buddhism the Buddha taught compassion, and in Hinduism, the giving “dana” (charity) is a part of one’s dharma.[3]
Today, they have taken the form of many different types of organizations. The most prominent of them is the form of Trading Enterprises. This refers to cooperatives, collectives, and other organizations that are worker- or employee-owned. They vary significantly in terms of size and organizational structure, but their joint ownership structure allows a higher degree of economic resiliency in comparison with other forms of enterprises. Next, they may be some types of Financial Institutions such as credit unions, cooperative banks, and revolving loan funds, which are membership owned. Registered social enterprises take the form of Community Organizations which are typically membership organizations that exist for a particular purpose and trade commercially. These may include community enterprises, community centers, housing cooperatives, community interest organizations, certain smaller shops, and sports clubs. Lastly, they may also take the form of Non-Governmental Organizations (NGOs) and Charities. 

Based on the very small representative sampling process conducted by British Council in 2016, there may be as many as 2,000,000 social enterprises currently operating in India, with definitive growth expected. 57% of them are young enterprises, i.e. are five years old or younger. With nearly two-thirds working with the objective of creating employment, more than half of the social enterprises create direct employment by employing disadvantaged groups in their workforce. A feather on the cap is 24% of the social enterprises are led by women, higher than the 8.9% female-led firms in mainstream business/ private sector firms. 53% of the social enterprises are engaged skills development activities, 30% in education, 28% in agriculture/fisheries/dairy, 26% in financial services and 26% in energy and clean technology.[3]
Cooperative and community-owned business models like Amul and Fabindia have existed in India since the 1950s, and the global social entrepreneur support organisation, Ashoka, introduced the term ‘social entrepreneur’ in 1981. Growth is set to continue with 78% of the social enterprises aim to expand into new geographical areas, 73% of the ventures aim to increase their customer base in the coming years, 71% aim to develop new products/ services, 64% aim to increase sales with existing customers, and 56% are looking to attract investments to expand.[3]
There have been various government efforts for financial inclusion through bank accounts and subsidies, but access to credit and markets continue to be tough, making it hard for rural workers to find sustainable self-employment. With multiple investment and funding players now in the ecosystem, and even shows like Shark Tank supporting social innovation, social entrepreneurs are now plugging these gaps at a hyperlocal level by mobilising different financial avenues to champion livelihood causes and encourage communities. 
According to an Asian Development Bank Report, an initial assessment of the social enterprise financing landscape indicates that the key sources of capital are non-institutional debt, equity (mostly self-finance), institutional debt, and grants. Traditional private equity investments are rare, and are largely limited to the more developed sectors such as microfinance, health, and agribusiness.[5]
Of course this sector too is evolving and so are the sources of finance. Today, the types of funds received include: grants from governments; grants from foundations; fees, sales and charges; and donations. The types of finance received include: capital grants; concessional loans, commercial loans; and equity or equity-like investments. Social enterprises registered as not-for-profit entities (NGOs and Section 8 companies) receive almost 60% of their funds in the form of grants from foundations and in-kind aid and donations. [3] 

Setting the ambitious target of reaching the mark of 5 trillion dollar economy by 2025, the GOI is working enthusiastically across different sectors to achieve this set target. Additionally, the growing importance of SDGs worldwide and India’s desperate attempt to improve its global ranking in its compliance after the recent drop, encourages India to promote in-house economic growth factors. With introduction of the Make-in-India campaign, it aims to generate more employment opportunities and promote businesses within the country and social enterprises are encouraged with multiple initiatives to promote and nurture them. 
Government support for startups along with the announcement and impending launch of the Social Stock Exchange has paved the way for a more positive atmosphere for social entrepreneurship in India. The Securities and Exchange Board of India has recently released the framework for a Social Stock Exchange, making it possible for social entrepreneurs to raise more funds and expand their impact and reach exponentially.
Another big step is engaging the private sector in social development through the amendment to the Companies Act, 2013. The Act made it mandatory for companies with a net worth of INR 500 crore (£55 million) or more to constitute a committee towards corporate social responsibility.  The mandate has considerably increased the funds available for non-governmental organisations (NGOs) in India.
There are 24 associations in India that work to influence predominantly small and medium enterprises and thereby carry the potential to also support social enterprises. Coupled with this, a total of 39 central government policies relevant to social enterprise and entrepreneurship have been mapped. [3]
Much before the onset of Make in India (2014), Action For India (2012) has been providing a stable platform for aspiring Social Entrepreneurs and Investors to help support human development. It helps social enterprises with fund raising, consulting, bespoke mentoring and early access to wide networks. 3iPartners, a group of established Silicon Valley entrepreneurs and executives, was formed to nurture India’s most promising Impact Enterprises in the Agri-Tech, Health-Tech, and Edu-Tech sectors.
Since then, multiple grants’ opportunities and schemes have been launched. National Rural Livelihoods Mission (NRLM), a flagship program of the Ministry of Rural Development launched in 2011 provides grants and financial assistance to social enterprises working in rural areas. Startup India initiative launched in 2016 supports startups, including social enterprises and offers various benefits such as funding, tax exemptions, and access to mentorship and networking opportunities. Mahila E-Haat, an online platform launched by the Ministry of Women and Child Development to support women entrepreneurs, including those running social enterprises provides a marketplace for women to showcase and sell their products and services. The Ministry of MSME, Credit Guarantee Fund Scheme, Prime Minister's Employment Generation Programme, and Scheme of Fund for Regeneration of Traditional Industries are some other notable schemes. Recently, NITI Aayog launched Atal Innovation Mission to support the objective. A leap forward, PPP models too have developed in this regard and one such is by National Skill Development Corporation that provides financial support and grants to social enterprises involved in skill training and development programs. 
While government regulated organisations and schemes are plenty, the private sector is no less. One such stream of aid is Impact Investor. They may be individuals, organizations, or funds that seek to generate both financial returns and positive social or environmental impact through their investments. Acumen is a global impact investment fund that invests in companies addressing poverty and sustainable development challenges. They have invested in various social enterprises in India across sectors like healthcare, agriculture, and energy. Unitus Ventures (formerly Unitus Seed Fund) and Ankur Capital are early-stage impact investors in India that supports startups in sectors like healthcare, education, and livelihood. Omidyar Network India is another philanthropic investment firm that invests in organizations and entrepreneurs who create social impact at scale. Startups may use impact investment platform such as I3N that connects social enterprises with impact investors. 
Multiple incubators and accelerators supporting social entrepreneurs and social organisations are now present in the ecosystem and are leveraging this moment to help develop India’s social enterprise ecosystem. Kaarigar Clinic, for instance, is supporting the artisanal community to become independent and earn incomes themselves by equipping them with market-ready business skills
A small hiccup however with them is their bias and subjectivity at a stage when startups are trying to set their ground in the industry. A free form of funds is crowdfunding which has gained significant popularity. It provides a platform for individuals or businesses to raise funds from a large number of people, typically through online platforms. Ketto is one of the largest crowdfunding platforms in India. It supports a wide range of causes, including social enterprises. It allows individuals and organizations to create campaigns, set fundraising goals, and share their projects with potential donors. ImpactGuru is another prominent crowdfunding platform that specializes in medical and social causes. It provides a user-friendly interface for creating and managing campaigns. Milaap, StartSomeGood, Catapooolt, Fueladream, Desired Wings to name a few others, are some of the platforms aiding social enterprises in their endeavour to raise money. 

Although investment was not a top growth plan, access to finance was the largest stated barrier identified by social enterprises, with 57% of the social enterprises identifying access to capital (debt/equity) as a constraint. There is a stark difference between social enterprises and mainstream business as only 15% of the mainstream businesses in the World Bank Enterprise Survey said that they faced some form of financial constraint (World Bank, 2014). This was especially pronounced in the North-East region, where support institutions are scarce and social enterprises are few. Even more difficult is most startups get caught in the vicious cycle of no funding- no impact- no new funding. They are constrained to even carry out pilots, discouraging further investments. 
Being a land of diverse cultures, this hasn’t fared all well for upcoming startups. Through interviews and discussions with social enterprise leaders and employees, it was found that individuals who don’t speak English or Hindi are often neglected and find their access to finance and support is almost non-existent. Banks too have been unaware and unwilling to lend to social enterprises with of certain backgrounds or those lacking proper collateral. In case foreign investors are interested, multiple layers of regulations delay the process, thus discouraging this as well. 
A pilot investment fund could be set up to enable social enterprises to prove their impact and assess whether they should receive further funding. Moreover, opening up NGOs to capital investments would further encourage social enterprises operating under the legal structure of an NGO.
More schools, universities, and research organisations need to encourage an entrepreneurial mindset among young people, particularly one geared towards tackling social challenges in communities and generating more jobs.
Inspiration from the West shall help India nurture and reap the benefits these enterprises are to offer. Loan guarantees as offered by the Bill & Melinda Gates Foundation, is an efficient way to leverage its donations and provide organizations with more-certain funding. For those facing issue with raising equity, a combination of equity and debt where its returns are indexed to the organization’s financial performance too can be employed either by government schemes or a form of PPP. Just like mutual funds help hedge risk in the securities market, a pooling institution can be set up that assembles portfolios from many microlenders, like the Switzerland-based social capital investor BlueOrchard. Another innovation, the social impact bond, deserves special notice for its ability to help governments fund infrastructure and services. Launched in the UK in 2010, this type of bond is sold to private investors who are paid a return only if the public project succeeds. Microfinance Institutions (MFIs) can be instrumental in scaling up the financial inclusion of women and youth from marginal populations, and thus should be governed by government norms and local bodies for smooth execution. 
In the Amrit Kaal (the 25-year period to 2047), social causes enthusiasts — driven by purpose, vision, value, and ethos to create a sizeable socioeconomic impact — can be trusted to shoulder more responsibility and be given a significant share of the economy. The need of the hour is a nourishing ecosystem for social entrepreneurs to take up programmes, bridge pandemic-induced gaps, scale-up existing initiatives, and be part of the mainstream response system.