How social impact companies may help tap impact investment funds

The high-level committee on CSR recently released a report that recommended the creation of a new class of companies called social impact companies (SICs) under the CSR framework

The high-level committee on corporate social responsibility (CSR) recently released a report that recommended the creation of a new class of companies called social impact companies (SICs) under the CSR framework. Shreya Prakash and Sunetra Ravindran explain how SICs will make a difference in the evolving CSR ecosystem: 

What are SICs?

SICs would be a new class of companies. These companies would be formed for the objective of carrying out socially useful activities, but would also be able to distribute profits to their shareholders (subject to certain conditions). 

While SICs would have the basic characteristics of a company (limited liability, share capital, a board of directors, etc), some additional governance requirements may be imposed on them to ensure that they meet their social objectives. 

What are comparable structures in other countries? 

The United Kingdom, the United States of America and Canada are a few countries which have structures comparable to social impact companies. 

In the UK, these structures are called community interest companies or CICs. CICs are companies established to carry out activities for the benefit of the community but may distribute profits to shareholders (subject to a cap). These companies are closely regulated by the Office of the Regulator of Community Interest Companies. 

In the US, these structures include benefit corporations, low-profit limited liability companies (L3Cs), or social profit corporations (SPCs). While the features of each of these corporations may vary, essentially these corporations pursue a general public benefit, or a socially beneficial purpose, in addition to pursuing a profit.

In Canada, there are two kinds of social impact companies, referred to as community contribution companies and community interest companies, in British Columbia and Nova Scotia, respectively. The purpose of these entities is to enforce a community purpose, that is, a purpose beneficial to society at large, which could include providing health, social, educational and environmental services, while being able to distribute profits to their shareholders (subject to a cap).

How are they different from Section 8 companies under the Companies Act 2013? 

Section 8 companies are those companies that are formed for the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment or any such other object. However, these companies are prohibited from distributing their dividends to their shareholders. 

Fundamentally, SICs would be different from Section 8 companies since they would have no such prohibition on distributing profits to their shareholders. Perhaps due to this ability to distribute profits to their shareholders, they may also be required to comply with more stringent requirements to demonstrate that they have achieved tangible social impact in comparison to Section 8 companies. 

How could SICs help raise and spend ‘CSR’ funds? 

Investment in SICs will generate financial returns, as well as social impact. This is likely to make mandatory CSR expenditure relatively attractive to corporates. Further, since SICs are likely to be better monitored for their impact, companies will have greater assurance that their CSR contributions are generating the intended impact. Entrepreneurs setting up SICs are likely to benefit from the brand value associated with ‘social impact companies’ at the time of raising CSR funds. 

SICs may also be able to bring in large amounts of private ‘impact investment’, both corporate and individual, for socially useful activities, outside the CSR route. The current size of the global ‘impact investment’ market is pegged at $502 billion by the Global Impact Investing Network. SICs may help India tap into this impact investment market by providing a special vehicle to attract such investments. This impact investment could build an ecosystem for ‘social impact start-ups’ and promote entrepreneurship and employment opportunities in socially impactful areas. 

The writers are research fellows at Vidhi Centre for Legal Policy