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Abstract<\/span><\/strong><\/span><\/p>\n In the context of a raging pandemic and climate change, renewed attention has been granted to the notion of sustainability. This has necessitated the corporates to embrace ESG in their respective governance verticals. In such backdrop, this Blog Post provides an overview of the rise and need for ESG investing in the contemporary context and summarises the meaning of Social Impact Bonds. Further, the company law landscape is explored to precisely dissect the question \u2013 is the existing framework under the Companies Act, 2013 sufficient to permit private capital inflows for social causes through new age instruments like Social Impact Bonds? A structure framed under the aegis of corporate social responsibility is then proposed and argued for. The manner of approaching such an undertaking is also laid out.<\/span><\/p>\n <\/strong><\/span><\/p>\n 1. Introduction: Investing with ESG at its Pivot<\/strong><\/span>\u00a0<\/span><\/p>\n \u201cSDG<\/em>,\u201d \u201cESG<\/em>,\u201d and \u201cimpact investing<\/em>\u201d \u2013 these buzzwords gained popularity and emerged as commonly known characters of the COVID-19 pandemic era. While the concept of sustainable development has long been accepted as a unanimous goal of humankind, its multifaceted undertones continue to be explored. Driven by factors like (a) the epochal jump in private equity transactions; (b) increasing inequities in the global population; (c) enlargement of mandates of corporations; and (d) the palpable ramifications of an interconnected order; sustainable development has taken the centre stage. In this context, the \u201cBerle-Dodd<\/em>\u201d debate appears (more or less) settled and the social responsibility of corporates well established.\u00a0<\/span><\/p>\n Given their impact, modern financing instruments with Environmental, Social, and Governance (hereinafter \u201cESG\u201d<\/strong>) at their respective nuclei, are being devised. ESG investing is a strategy deployed to assess the performance of corporates on metrics other than purely financial ones. Apart from allowing investors to consciously contribute to the enhancement of environmentally and socially oriented issues, ESG investing strategy also promises profitable returns. For this purpose, the United Nations (hereinafter \u201cUN\u201d<\/strong>) had formulated the \u201c<\/span>Principles for Responsible Investment<\/em><\/a>\u201d in 2006, based on which a blueprint was subsequently released in 2017. Through the six principles so formulated, the UN introduced the concept of fiduciary duties of investors on whom obligations such as: incorporating ESG in their investment analysis and decision making, seeking appropriate ESG-related disclosures, implementing the said principles, etc., among others, were levied.\u00a0<\/span><\/span><\/p>\n Considering the backdrop laid out above, this post explores the relevance of Social Impact Bonds-one of the tools aimed at ESG investing, in the Indian context. To this end, the viability of SIBs vis-\u00e0-vis <\/em>the existing company law regime has been discussed.<\/span><\/p>\n <\/strong><\/p>\n 2. Overview: What are Social Impact Bonds?<\/strong><\/span>\u00a0<\/span><\/p>\n A Social Impact Bond (hereinafter \u201cSIB\u201d<\/strong>) is one such modern financial instrument, the keystone of which is ESG. An SIB is a \u201cpay-for-success<\/em>\u201d instrument to raise finance for public-sector issues, identified to create effective solutions to address the same. Generally, a \u201cpay-for-success<\/em>\u201d instrument<\/span>involves<\/a> the following key parties:\u00a0<\/span><\/span><\/p>\n a. Outcome payers<\/em><\/strong> \u2013 Usually, the party responsible for identifying the social issues for which solutions are being sought shoulders the obligation of paying returns if the pre-set outcomes are achieved.\u00a0<\/span><\/p>\n b. Service providers<\/em><\/strong> \u2013 Commonly, service providers are bodies\/organisations with sub-agencies or departments that possess the tools of ideation and execution to attain data-driven solutions for the identified social issues.\u00a0<\/span><\/p>\n c.<\/em> Investors<\/em><\/strong> \u2013 Investors have adequate capital who provide (ordinarily, upfront) funding to the service providers. The repayment due to these persons is interlinked with the project\u2019s success, for which a \u201cpay-for-success<\/em>\u201d instrument is floated.\u00a0<\/span><\/p>\n In respect of the SIBs, the \u201coutcome payers<\/em>\u201d are typically governments or governmental bodies (like central\/state governments, municipalities) that call the service providers\u2019 and investors\u2019 attention to socially-oriented issues. Agencies responsible for implementing a socially oriented project operate as \u201cservice providers<\/em>.\u201d Further, persons with access to substantial capital pools, who are keenly focused on both the financial and non-financial returns of the outcome generated, act as the \u201cinvestors<\/em>.\u201d<\/span>\u00a0<\/span><\/span><\/p>\n In this light, the pertinent issue to be appraised becomes \u2013 whether the existing framework under the Companies Act, 2013 (hereinafter \u201cthe Act\u201d<\/strong>) and the rules legislated thereunder is sufficient to encourage their deployment as a medium for Corporate Social Responsibility (hereinafter \u201cCSR\u201d<\/strong>).<\/span><\/p>\n <\/strong><\/p>\n 3. SIBs in the Indian context: How can Companies imbibe SIBs in the corporate ecosystem for CSR?<\/strong><\/span>\u00a0<\/span><\/span><\/p>\n Concerning certain ESG parameters, a disclosure-based scheme has been adopted by the Indian financial market regulator, i.e., the Securities and Exchange Board of India (hereinafter \u201cSEBI\u201d<\/strong>). The<\/span>Business Responsibility and Sustainability Report charts out<\/a> the format for the top 1000 listed entities (by market capitalisation) to divulge information for sustainability reporting. Furthermore, the SEBI has constantly assumed the mantle of laying down guidance for green debt securities in<\/span>2017<\/a> and<\/span>2021<\/a>. Contrastingly, while SIBs have been in the global market since the early 2010s and have proven successful in the United Kingdom, the United States of America, and other countries, adequate dialogue on their adoption in India is still wanting. Arguably, a pure disclosure-centric regime may not be sufficient to achieve the goal of sustainable development, i.e., a concept the undertones of which, in turn, require fulfilment of other objectives (like inclusive development).\u00a0<\/span><\/span><\/p>\n Per the Financial Budget for FY 2022-23 (hereinafter \u201cBudget\u201d<\/strong>), the government<\/span>again emphasised<\/a> on its reliance on blended finance as a suitable avenue for raising capital for \u201cgreen<\/em>\u201d ventures. To this end, the Central Government<\/span>proposed<\/a> issuing sovereign green bonds in the Budget. This is unsurprising given the enhanced governmental focus on \u201cgreen financing<\/em>\u201d<\/span>in the last decade<\/a>. Notwithstanding, one of the other key objects of the 2022-23 Budget was \u201cinclusive development<\/em>.\u201d It was only last year, i.e., in 2021, that the municipal corporation of Pimpri Chinchwad, a city in Maharashtra known for its auto industries, entered a Memorandum of Understanding (MoU) with United Nations Development Program (UNDP) India to design India\u2019s foundational SIB. The<\/span>social cause that this project is concentrating<\/a> on is affordable, accessible, and high-quality healthcare to the citizens of Pimpri Chinchwad. An indispensable aspect of sustainability is inclusive development, which, inter alia<\/em>, requires development across sectors (like healthcare, education, housing), classes, communities, and other areas. Fittingly, SIBs would prove instrumental in catering to the objective of inclusive development.\u00a0<\/span><\/span><\/p>\n Addressing the question of whether the extant structure of the Act is expansive enough to allow eligible companies to undertake CSR by directing the earmarked capital through SIBs.<\/span>Section 135(1) of the Act<\/a> obligates every company possessing \u2013 (a) net worth of Rs. 500 crores or more; or (b) turnover of Rs. 1000 crores or more; (c) or a net profit of Rs. 5 crores or more; during the immediately preceding financial year, to constitute a Corporate Social Responsibility Committee of the Board, composed in the manner so prescribed. In terms of Section 135(3), the Corporate Social Responsibility Committee (hereinafter \u201cCSR Committee\u201d<\/strong>) is required to formulate the CSR policy for the concerned company. The said CSR policy of the concerned company, subsequently approved by the Board of Directors, must indicate the activities to be undertaken in the areas or subjects as prescribed in Schedule VII of the Act.<\/span>Schedule VII of the Act<\/a> details a list of potential activities – inter alia<\/em>, health, sanitation, promotion of education, rural development, slum development, disaster management, protection of heritage\/art and culture. Evidently, Schedule VII enumerates a cross-sectoral list that is comprehensive enough to include CSR projects on a myriad of social causes. Such cross-sectoral development is crucial even for achieving specific Sustainable Development Goals (hereinafter \u201cSDGs\u201d<\/strong>).\u00a0<\/span><\/span><\/p>\n Governmental bodies can, hence, acknowledge investment so made through SIBs under the aegis of CSR, subject to compliance with the conditions stipulated in the Act and Companies (Corporate Social Responsibility) Rules, 2014 (hereinafter \u201cCSR Rules\u201d<\/strong>). Amendments to the Act, where necessary, can be carried out to this end, similar to those introduced for including contribution to Clean Ganga Fund, Swachh Bharat Kosh, and Prime Minister\u2019s Citizen Assistance and Relief in Emergency Situations (PM -CARES) Fund,<\/span>in Schedule VII<\/a>. Since CSR<\/span>can be implemented directly or through implementing agencies<\/a>, the task of execution of a given CSR project can be outsourced to an entity suitable to qualify as an implementation agency under the Act. As explained above, such entities would be \u201cservice providers<\/em>\u201d for an SIB. Moreover, as the SIBs are generally designed in tandem with a governmental association, companies would feel more confident donning the role of investors vis-\u00e0-vis<\/em> SIBs. In addition, independent evaluation of the performance of these instruments makes their monitoring more convenient and objective.\u00a0<\/span><\/span><\/p>\n As per Rule 7(2) of the CSR Rules, the surplus generated from CSR activities should not form a part of the business profit of the company concerned and should be \u2013 (a) ploughed back into the same project; or (b) transferred to the unspent CSR Account (under the Act) and spent in pursuance of CSR policy and annual action plan; or (c) transferred to such funds, as prescribed under Schedule VII; within six months of the expiry of the financial year. Therefore, within a given financial year, the CSR Committee can earmark the recommended proportion of available corpus for investment in SIBs. Depending upon the success of the SIB so opted, the profits accruing from such investment, if any, can then be ploughed back and recycled for the end of CSR. This way, the eligible companies can be incentivised to invest in public-sector-oriented projects carrying the potential of generating profits. Given their potential of yielding profits from a CSR-oriented investment, such a recycling mechanism of the profits and surplus amounts generated via<\/em> SIBs would go a long way to cultivate corporate interest in social responsibility, which for the major part, continues to be perceived as a mere legal obligation. Arguably, such an ecosystem may prove conducive for encouraging corporates to assume more active roles in the social sphere. Hence, SIBs could be utilised to secure corporate funding under the mandatory requirement of CSR for an identified project.\u00a0<\/span><\/p>\n The potential benefits for permitting corporate spending on SIBs as a CSR mandate are, hence, manifold and include the following:\u00a0<\/span><\/p>\n a. Increased investor confidence where SIBs have governmental approval.\u00a0<\/span><\/p>\n b. Access to enlarged pools of the capital of private persons made available for CSR.<\/span><\/p>\n c. The benefit of the expertise of service providers equipped with the necessary tools for the execution of a given project.<\/span><\/p>\n d. Independent evaluation of the performance of the SIB, lending objectivity to the success of the CSR project.<\/span><\/p>\n