1 Blended Finance is a novel and upcoming area. How does D&A define blended finance, and how do you distinguish it from other innovative financial instruments? What steps can be taken to clear the ambiguity and confusion around blended finance terminology in the Indian market?

Blended finance is a strategic investment approach to address the financing gap for social impact and climate action. It has three main objectives - to increase the pool of capital, to make this capital more affordable, and to ensure it is deployed effectively with greater accountability. It is not an asset class like impact investing but a cross-cutting approach that works across the capital spectrum and involves partnership between public, philanthropic and private capital. Blended finance has three major pillars namely leverage, returns and impact. Leverage refers to increasing the capital pool by using low or non-return seeking public and philanthropic capital to unlock significant investments from commercial capital. The risk-return tradeoff of such commercial investments can be improved with blended finance structures like guarantees that allow derisking of capital, and interest-subvention which makes capital more affordable. And impact is independently measured, incentivized and priced with outcome based instruments. Given its extremely broad scope, there is indeed ambiguity about blended finance, and we need to be more precise in the use of terminology. Blended finance is not a sector, or financial instruments, or an asset class. It’s an investment approach that aims to unlock more capital for development and make it more effective. It is an area which faces blockages due to challenges in regulations for mixing non-profit and commercial capital, and limited existence of transactions. But that is changing due to the efforts of many IIC members working on the ground, and ultimately the blended finance projects that come to market will help to define the term itself.

2 What are the primary sectors D&A is currently engaged in? Could you elaborate on the specific blended finance structures (e.g., first-loss capital guarantees, outcome-based financing) that can be employed for these sectors?

D&A’s approach is sector agnostic. Our focus is on major development themes relating to increasing the incomes of underserved populations while also addressing the climate challenge. Thus some of the key thematic areas where we are active include Climate Action, Livelihoods, Women’s Economic Empowerment and MSME Development. This translates into specific sectors where we have active projects such as Agriculture, Water & Sanitation and Skilling.

Across sectors, the following are some of the key blended finance structures:

1. Structures like credit guarantees help derisk commercial investments for private investors and expand financing into new products and markets.
2. Concessional capital structures like interest subventions, junior equity tranche, junior debt are used to make investments more affordable.
3. Structures like project preparation facilities help build a healthy pipeline of bankable projects, and enhance the overall quality of capital deployment.
4. Structures like impact bonds and pay-for-success instruments link capital deployment to outcomes, making the capital accountable for impact.

3 How does Desai & Associates facilitate better collaboration between philanthropic and commercial stakeholders in blended finance transactions particularly when there are mismatched expectations in terms of risk, return, timelines etc?

Desai & Associates helps philanthropic organizations develop robust private-sector engagement strategies for deploying their capital into initiatives with a market-led approach. This helps to balance their portfolio into initiatives that help strengthen impact in depth as well as scale, and catalyze new investment from other sources. Our goal is to transform philanthropists - HNIs, CSR and Foundations especially those based in and focused on India - to a catalytic financing mindset, building structures, systems, and processes for existing and new philanthropic capital to provide more in-depth impact, at scale, and unlock more capital.

For commercial players, Desai & Associates engages with them on design and structuring blended finance facilities that build a healthy pipeline of bankable projects, reduce transaction cost, and design financial instruments and fund-flow mechanisms that help derisk existing and new commercial investments, and make capital more affordable. This platform approach of bringing end-user clients, philanthropy and commercial players together helps co-create enduring solutions for capital mobilization and deployment across sectors and use-cases.

4 What are the key challenges in India that hinder the growth of blended finance? How can the economic models of blended finance be simplified to improve stakeholder understanding and participation?

There are three major challenges - regulatory and legal ambiguities, market fragmentation and knowledge asymmetry and cognitive barriers and mindset gaps - which we explain below.

Regulatory and Legal Ambiguities

India lacks a unified regulatory framework for blended finance, creating uncertainty around tax treatment, capital interoperability, and risk-sharing mechanisms. Specific examples of this:

• Philanthropic Capital Restrictions: Charitable funds under the FCRA Act cannot engage in for-profit activities, limiting catalytic philanthropic grants in blended structures.
• Structuring junior and senior tranches of equity and debt capital pooling: Clarity on capital pooling with differentiated returns for different pools of capital and different types of investors, for debt funds and equity funds in India as governed by SEBI regulations.
• Withholding Tax Clarity for foreign investors: Ambiguities in cross-border transactions deter foreign investors including development finance institutions investing in India.

Market Fragmentation and Knowledge Asymmetry

• Pipeline Deficits: Only one-third of all microenterprises in India access loans with ticket sizes above INR 50,000 due to stringent collateral requirements, constraining scale.
• Bespoke Structures: Most blended transactions require custom legal frameworks, raising average structuring costs by 15–20% and creating a need for legal templates.
• Stakeholder Misalignment: Philanthropists prioritize social returns (0–5% IRR), while commercial investors demand much higher IRR, creating friction in risk-sharing.

Cognitive Barriers and Mindset Gaps

• Philanthropic Hesitation: 70% of Indian family offices view impact investing as separate from charity. Philanthropists remain averse to providing ‘subsidies’ to private capital.
• Commercial Risk Aversion: Banks allocate <5% of portfolios to climate projects due to perceived technology and repayment risks and require fully risk adjusted returns.

Simplification of economic models will require concerted efforts to templatize financial structures, build education platforms for funders as well as policymakers, and implement greater transparency initiatives. It will also require consistent policy and regulatory dialogue and engagement across various ministries, regulatory bodies, and institutions.

5 How can blended finance be incorporated as a strategic lever for system-level change in large-scale government programs? Can you share examples of how the government has successfully applied blended finance to crowd in private capital?

The Indian government has been at the forefront of crowding in private sector capital, leveraging existing public sector investments. This is a critical component of the Viksit Bharat 2047 vision of the Government of India, highlighted in the union budget speeches. A prime example is the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). With a corpus of USD 2 Bn, this fund has supported projects worth USD 23 Bn in FY2023-24. Cumulatively, a total of USD 74 Bn has been unlocked using this corpus fund of USD 2 Billion in the last five years.

Another great example is the National Agriculture Infra Financing Facility under the Agricultural Infrastructure Fund, launched in 2020. This facility is a USD 12 Bn ten-year facility providing up to 300bps interest subvention and waiver for CGTMSE fees to all approved agricultural infrastructure projects between INR 20 lakh to INR 5 crores.

The recent ITI upgradation scheme being implemented by the Ministry of Skill Development & Entrepreneurship is also a step in the right direction, with a total outlay of USD 6.8 Bn, with 50% coming from the centre, 33% from the state government, and 17% from the private sector.

Similar trends of bringing in private sector capital are now scaling up, through initiatives like the Lakhpati Didi initiative by the Ministry of Rural Development, the SWAMIH Fund 2 for Affordable Housing, the Maritime Development Fund, Fund of Funds for startups, IIPDF (India Infrastructure Project Development Fund), Urban Challenge Fund, and the Deep Tech Fund.

6 How does D&A work towards capacity building and market making for blended finance structures to address the gaps in the ecosystem?

D&A works towards market making and capacity building by democratizing knowledge, engaging with the government and policymakers, and enhancing market players' capacity. This is done through the following ways of engagement/initiatives:

1. Education/Knowledge: D&A’s founder has delivered higher education courses on innovative finance at top universities including Ashoka University, ISDM, Anant, Ambedkar. Additionally, D&A also built an open digital platform called the Impact Finance Academy which has up-to-date high-quality learning resources including videos, case studies, publications on innovative finance.
2. Policy Engagement: D&A engages with key government bodies/policymakers in India (MoF, SEBI, PM-EAC, Niti Aayog) as well as high level international dialogues at the United Nations on financing for development towards building targeted policy recommendations and strategies to facilitate blended finance. Our white paper on innovative finance policymakers is available in the public domain.
3. Capacity building: D&A has also set up Parinaam, a first-of-its-kind collaborative platform, to build common understanding and showcase ways of engagement in innovative finance among key stakeholders, particularly capital providers. This is done through collaborations via joint research and convenings, with industry bodies and collaboratives (e.g. Accelerate India Philanthropy).

7 Based on your experience, what are the top 4-5 regulatory or policy changes that need to happen to enable more blended finance transactions in India?

Based on a study by D&A in collaboration with Prime Coalition, addressing the following policy/regulatory challenges can enable more blended finance transitions in India.

a. Liberalising Regulatory Framework for Foreign Capital Deployment

1. The direct deployment of foreign catalytic capital faces significant operational and regulatory hurdles. Simplifying the process for direct equity (FDI), debt (ECB or NCDs), and service contracts would encourage more foreign investments.
2. Streamlining approval processes and reducing compliance burdens for direct investments can help smaller capital providers enter the market more efficiently.

b. Enhancing Regulations for Offshore Capital Aggregation

1. Offshore aggregation faces issues related to double taxation and jurisdictional regulatory compliance. Harmonizing tax structures and clarifying the regulatory stance on offshore investments would ease the deployment of foreign catalytic capital into India.
2. Establishing clear norms for pooling offshore funds with domestic Alternative Investment Funds (AIFs) can further facilitate investment.

c. Simplifying Unified Capital Structures (Onshore and Offshore Integration)

1. Policies that address the complexity of aligning objectives between onshore and offshore entities would reduce the resource burden.
2. Clearer guidelines for managing governance and regulatory compliance across jurisdictions will make these structures more appealing

d. Regulatory Clarity for Differential Returns in Onshore AIFs

1. There is a need for clearer guidelines on differential returns and investment goals for onshore AIFs.
2. This would help fund managers structure deals more attractive to foreign catalytic capital while maintaining alignment with regulatory standards.

e. Creating Regulatory Sandboxes for Testing Blended Finance Structures

1. Enabling regulatory sandbox for blended finance (e.g. in GIFT City) will enable policymakers to assess the impact of new financial instruments while protecting investors and ensuring regulatory compliance.