A beneficial funding route

September 5, 2020 5:30 AM

Setting up the first regulated, non-profit focused ‘social stock exchange-listed’ social venture fund can be a major milestone for India’s non-profit sector

A type of alternative investments fund (AIF) permitted by India’s securities regulator, the Securities and Exchange Board of India (Sebi), an SVF is an intermediated structure that can receive funds from donors and investors, who are issued units in exchange.A type of alternative investments fund (AIF) permitted by India’s securities regulator, the Securities and Exchange Board of India (Sebi), an SVF is an intermediated structure that can receive funds from donors and investors, who are issued units in exchange.

By Varad Pande & Deepti George

Finance has greased the wheel of commerce for centuries, and this journey has been driven by innovation. The development of sophisticated financial instruments, especially in the last few decades, has created access to previously untapped pools of capital for businesses. These include banks with retail deposits and lending or mutual funds that allow individuals to partake in the growth of businesses.

The time has now come to bring this financial revolution to the social sector.

One financial innovation that can be a gamechanger for the social sector is a social venture fund (SVF). A type of alternative investments fund (AIF) permitted by India’s securities regulator, the Securities and Exchange Board of India (Sebi), an SVF is an intermediated structure that can receive funds from donors and investors, who are issued units in exchange. Much like a mutual fund, it is managed by a professional fund manager, who then ‘invests’ the funds. The difference being that an SVF can invest in securities issued by social sector organisations, including non-profit organisations (NPOs). Unlike other AIFs, the structure of an SVF allows it to receive grants alongside commercial capital and disburse them. Interestingly, while SVFs have been allowed since 2012, no non-profit focused SVF launched in India so far.

So why is an SVF a promising financial innovation for the cause of social impact?

First, it unlocks the benefits of a collective grant-making entity that is managed by a professional ‘fund manager’.

For donors, it offers an opportunity to discover better or lesser-known NPOs through an expert funder manager. This is comparable to what a general partner does for limited partners in the venture capital/private equity world. It is cost-effective, as it limits the need for donors to have their own in-house teams and domain expertise to diligence grantees. It enables access to a large NPO pool without the need for on-ground presence, which is especially useful for foreign philanthropic funders.

For NPOs, it broadens the pools of capital by crowding in new funders and lowers overheads and reporting requirements. This is because they have to deal only with the manager of the collective entity, and not with individual donors. This liberates NPOs from the burden of reporting to different donors in different formats and reporting cycles and frees up more of their organisational mind space to focus on their mission.

For the non-profit sector as a whole, it enables the creation of new far-reaching opportunities for impact at a scale, which may otherwise not happen, such as large collective efforts around specific causes like adolescent girls, migration, etc.

But, the benefits of setting up a regulated SVF go beyond that of any generic collective grant-making entity.

The ‘trust-mark’ that comes with being a regulated entity provides greater confidence to new non-traditional funders. The regulatory umbrella of Sebi brings in greater credibility and accountability and also minimises the perception of idiosyncratic risks associated with a non-regulated, traditional grant-manager.

The Sebi working group (WG) on the social stock exchange (SSE) takes the SVF concept a step further. It recommends that the units issued by SVFs should be listed on the envisaged SSE, provided that the recipients of these funds commit to reporting their social impact performance on the SSE in standardised disclosure formats proposed by the WG. Listing on the SSE will, therefore, enable greater clarity on the “what” and the “how” of the impact created, using standardised frameworks. Over time, the availability of information on the impact performance of various NGOs can help well-performing NPOs raise more capital and scale up their work, and incentivise the attainment of impact goals.

Setting up the first regulated, non-profit focused ‘SSE-listed’ SVF can be a major milestone for India’s non-profit sector. It could become a template of sorts that can be replicated to create an additional fundraising route for non-profits.

We believe that the SVF innovation could be as important to the non-profit sector, as mutual funds have been to investors, who can now participate in financial markets without having to set up in-house teams to do stock-picking. The onus is now on the government, Sebi and the first set of bold funders to seize the moment and make this a reality.

The authors work with Omidyar Network India and Dvara Research respectively. Views are personal

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