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Author: Jahnavi Bhuptani, 3rd year student, Gujarat National Law University
Introduction
The burgeoning economic and financial landscape begets a pioneering approach to seamlessly amalgamate capital flow across all sectors, as well as compound its effect to permeate and meet the requirements as posed for social impacts. Corporate Social Responsibility [“CSR”], is now an important aspect of the corporate organisations due to the effect it provides on brand reputation. The strategic influence of CSR can be traced back to the 1950s where the American economist Howard Bowen coined the term in his publication Social Responsibility of the Businessman. The permeation of CSR in the Indian corporate framework was interspersed with the rise of corporate philanthropy which finally was converted into a legal mandate through the 2013 Companies Act.
The advent of CSR and its intention to entrench on public good is now met by a new and useful instrument- that is, blended finance. The existing approach to the concept of ‘Blended Finance’ is impactful investing by participating organisations and enhancing the possibility of parallel investments by multiple stakeholder organization. The application of blended finance is done with the primary aim of extracting a horizontal effect of investments, that is, allowing different financial investors to invest alongside each other while achieving their own objectives (whether financial return, social impact, climate governance or a blend of both). A question then arises as to how blended finance, through its novel approach, ‘blends’ with CSR initiatives and causes a positive affiliation for the working of private corporations.
Existing Jurisprudence
In India, the system of blended finance works on a collaborative effort of funds converging philanthropic foundations and public sources to mobilise additional capital from private sectors to fuel sustainable development. That being said, there are no legislations in India that delineate the implementation of blended finance models, however, a stark inclination to amalgamating blended finance can be understood through the purview of Foreign Contribution (Regulation) Act, 2010 [“FCRA”], Foreign Exchange Management Act, 1999 [“FEMA”] and Income Tax Act, 1961 [“IT Act”]. A fund created through blended finance would not be regulated just as a private or a public fund in isolation. Taking the March 2015, SEBI guideline for facilitation of financial services in securities market and setting up of Alternate Investment Funds [“AIF”] and the subsequent operating guidelines of 2018 which sets the background of regulatory frameworks for International Financial Service Centre Authorities [“IFSCA”]. Furthermore, the elimination of tax risks associated with General Anti Avoidant Rules [“GAAR”], and Place of Effective Management [“POEM”]- which in turn demonstrate a desire for sustenance of AIF in IFSCAs. However, it may be noted that the tax breaks are exclusively tailored for non-residents. Resident Indians can remit money to IFSCAs like GIFT City through the Liberalised Remittance Scheme [“LRS”] but are limited to investing in securities issued by entities outside India.
Therefore, in India, there are no exact legislations which govern the working of blended finance. The existing jurisdiction revolves around the OECD principles for increasing use of concessional funds blended with Development Finance Institutions’ [“DFIs”] own financing and that of others on commercial terms has brought DFIs together to firstly, develop common standards for the implementation of blended concessional finance projects; secondly, provide transparent, comprehensive and consistent data on their blended concessional finance activities; and thirdly, discuss and review the merits and adequacy of existing approaches to blended concessional finance activities.
However, it may be noted that the regulatory framework of United States of America [“USA”] gives more diffidence to the implementation of blended finance scheme. Here, the implementation tactic as such is divided through structures which clearly illustrate equity investors and lenders. However, its principles work parallelly with that prescribed in OECD. The German legislative provides for an illustration of successful implementation of blended finance. GuarantCo, a Private Infrastructural Developmental Group [“PIDG”] accomplished the execution of blended finance by creating three units of stakeholders- selected public donors for local investments, capacity workshopping for the local investors and developing guarantees in local currency to further local capital markets. The proceeds of these directly benefitted domestic infrastructure in the low income countries of Africa. In this very trench, green finance planning may also be highlighted. Green finance is similar to blended finance in the sense that it amalgamates public and private sector efforts in order to achieve a sustainable and resilient approach. An example is the Singapore Green Finance Plan of 2030. Another comparison may be drawn by USA’s approach of gathering institutional, corporate and activist support to implement green financing while the European Union focuses more on Government initiatives.
Differential Economic Rights Created by SEBI
The formation of AIF, irrespective of carrying importance in the regime of blended finance, the correct implementation of the is met with hurdles. Firstly, the Reserve Bank of India [“RBI”] has restricted investment funnelling of scheduled commercial banks only to category I and II AIF. So, while the current investment scheme for AIF has opened a significant source to raise capital domestically, the approach to blended finance requires a mix of foreign as well as Indian capital. But at the same time- the influx of AIFs feeds into the issue of transparency within the corporate opting for such funds and the process of implementation of the funds. Inasmuch, the SEBI (Alternative Investment Funds) Regulations, 2012 [“AIF Regulations”] come as a welcome relief for identifying the status of AIF for institutional investors and the proposed investor grievance addressal mechanism which must be adhered to.
When it comes to the purpose of blended finance, differential rights are created in order to restrict limited partners [“LPs”]. This in turn created a difference between concessional as well as the commercial capital being uptaken by a corporate. The goal of concessional capital is to assist worthwhile initiatives that tackle important issues related to global development. In these situations, the AIF’s corpus often consists of capital contributed at market rates by both public and charitable LPs in addition to private LPs.
Concessional capital providers are typically in a subordinate position in these types of blended financing deals, with terms offered that are less advantageous than those for commercial capital. When it comes to blended financing transactions including both concessional and commercial capital, SEBI has not specifically granted any exceptions.
Impact Funds and Impact Investments
The avenue of AIFs falls short to substantially fund and successfully integrate blended finance into a stringent corporate system. In order to clearly understand the ambit of blended finance, it must be juxtaposed with the capital through which it shall be generated. This necessity underscores the role of ‘impact funds’ and ‘impact investors’. Impact funds contribute to the creation of positive social and environmental effects in addition to financial gains. To improve the economic viability of new technologies and expedite the transition, public, private, and charitable money will be brought together through the establishment of an impact fund inside IFSCA. They hold a permeative utility, however, in absence of a common framework, the potential of scaling blended finance deals is limited. The corpus as allocated through funds structured for blended finance would be huge and hence, in direct position of being misused. The consequences of devolving funds acquired across various sectors without having a standardised metric for its implementation would be harrowing. Investing regulation of an IFSCA is challenged due to impact investment in the current paradigm is its permissibility through this legislative framework. The route to funding for the investors may be bifurcated as direct investments and the enterprises who do not wish to be involved in the day to day operations of the companies uptaking the blended finance model.
The corrective measure for impact funding belies in the trust created among the investors. This transparency may be understood through three limbs: firstly, operation and circulation of non- convertible debentures which aligns to green- social impacts and SDGs. Secondly, the IFSCA circular for the fund managers which necessitate comprehensive and periodic reading and analysis of ESG implementation. Lastly, by focusing on the IFSC (Fund Management) Regulations, 2022 fund managers in charge of more than $3 million in assets should consider significant sustainability risks when making investment choices in private placement memorandums leading Investors to have assured transparency across fund sizes and strategies.
Therefore, the acumen of blended finance is delegated by the robust investments funneled in the system. In that trench, the investments can be channeled directly or through an external commercial route. Impact investment must be made in congruence to the Indian Trust Acts, 1882and Companies Act, 2013. The implication under Section 8 of Companies Actfosters activities under the of non- profit companies and the objectives for which remain stringently under the ambit of social, environmental, humanistic development. The non- profit and charitable activities beget their permissive application from the FCRA and FEMA. Therefore, in relation with the legislations, a template for impact report detailing non-financial returns alongside financial performance and tax incentives for impact funds deploying capital towards underserved areas like education, healthcare, clean energy etc are required. Furthermore, regulatory sandbox for piloting new impact fund models like pay-for-success funds, carbon funds, blue economy funds etc. can also be implemented.
Conclusion
In conclusion, blended finance vehicles anchor their activities to SDG targets. For example, GIFT City’s blended finance landscape- or any new IFSCA for the matter-must emphasise on three key strategies. Firstly, there is a critical need to ensure alignment with internationally recognized standards and frameworks. This involves benchmarking Indian blended finance regulations against established principles such as the OECD Blended Finance Principles and the IFC Operating Principles for Impact Management. Conducting a comprehensive gap analysis to identify inconsistencies between local policies and global best practices will guide necessary amendments and harmonization efforts. Additionally, the formation of an expert committee tasked with studying leading international practices will provide valuable recommendations for policy refinement and alignment, facilitating a more cohesive regulatory framework. Furthermore, instituting an online centralized platform for blended finance funds to publish performance reports and requiring third-party audits for impact reporting and sustainability disclosures will further enhance transparency and accountability within the blended finance ecosystem. By addressing critical gaps, aligning with global standards and SDGs, fostering awareness and capacity building, and promoting impact investments, these solutions aim to unlock the transformative potential of blended finance and pave the way for sustainable development endeavours to thrive in the Indian corporate system, specifically pertaining to IFSCAs.
