Pratik Bakshi is a counsel in the ESG and Impact practice of BTG Advaya. He is engaged by clients from various sectors, such as retail, technology, and extraction, to advise on issues relating to business and human rights (BHR), environmental, social and governance (ESG), corporate social responsibility (CSR), human rights due diligence and business sustainability. Pratik has also been actively involved in policy and advocacy, and has been consulted on the drafting of modern slavery legislation, and legislation on strategic lawsuits against public participation (SLAPP).

About BTG Advaya:

BTG Advaya is a disputes and transactional law firm particularly focused on the following sectors, where they track industry issues: defence, industrials, digital business, energy (renewables and nuclear), retail, transport (railways and electric vehicles), and financial services.

Its practices include corporate transactions (capital raise, M&A, JVs, investments, exits, restructuring and reorganisations), commercial contracting, public procurement, private equity & venture capital, regulatory compliance & risk mitigation, labour & employment, pre-litigation advisory & dispute management, business crime and other areas of law that are fast-developing, with rapid changes in technology and methods of doing business.

It has offices in Mumbai, New Delhi, and Bengaluru.

1 As the understanding and interest around ‘impact investing’ garners more steam in India, could you share some of the key regulatory and compliance aspects in India that prospective investors need to be aware of while building an investment thesis geared towards ‘impact’ enterprises?

SEBI has in the past few years introduced several regulatory changes to make impact investments more attractive for investors. In July 2022, the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) was amended, which transformed Social Venture Funds into Social Impact Funds (“SIFs”). This broadened the scope of eligible investments to include both social ventures and for-profit social enterprises.

Moreover, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”), the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), along with the AIF Regulations have been amended to make way for a regulatory framework for Social Stock Exchanges (“SSE”). SSEs, which operate within established stock exchanges like BSE and NSE, offer innovative fundraising instruments such as Zero Coupon Zero Principal (“ZCZP”) securities and Development Impact Bond (“DIB”) for non-profit organisations and equity/debt for for-profit organisations. Registration with the SSE provides some assurance of SEBI regulation for listed social enterprises, boosting investor confidence. Moreover, the impact metrics specified during issue of securities are subject to scrutiny under Social Audits by a Social Auditor. Tax incentives proposed for SSE investors include deductions under Section 80G for investments in NPO securities, CSR expenditure deductions for corporates, and exemptions from Securities Transaction Tax and Capital Gains Tax. These measures aim to promote impact investing and support social enterprises. However, Foreign Institutional Investors and Foreign Portfolio Investors are not allowed to invest in the securities issued by the NPO entities.

Moreover, the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“NCS Regulations”) have been amended to bring the existing framework for green debt securities in line with the updated Green Bond Principles, published by the International Capital Markets Association, and recognised by the International Organisation of Securities Commissions. This amendment includes yellow, blue and transition bonds, and provides much needed clarity on the activities that will be considered as ‘green’, attracting investments and financing in such areas.

2 We see an increasing interest from diverse investor profiles including CSR and Family Offices towards investing in innovative impact enterprises. What are the regulatory enablers in India, that allow for a diversified investor pool to participate in such transactions?

In India, various regulatory enablers exist to facilitate a diverse pool of investors, like CSR funds, family offices, mutual funds, insurance companies, pension funds, and banks etc, to participate in impact investments. Insurance companies, for instance, are allowed to invest in infrastructure and social venture funds under the AIF category. However, exposure limits are in place, with 10% for social ventures and 20% for infrastructure funds, ensuring prudent risk management. Moreover, the IRDAI had on 28 June 2023 passed a circular issued guidelines for investments in AIFs by insurance companies in a bid to enhance transparency and uphold policyholders' interests. This circular requires insurance companies investing in AIFs to declare their Net Asset Values on a quarterly basis, make quarterly returns submissions in a specified format, and mandates prior approval from the board or investment committee for rollover of AIF investments.

Similarly, Pension Schemes are permitted to invest in AIFs, with restrictions limiting opportunities for smaller-scale impact projects. Mutual funds face challenges due to restrictions on the marketability of privately placed AIF units, impacting their ability to invest in social impact funds. Banks, as significant sources of capital, require Reserve Bank of India (RBI) approval for investments exceeding 10% of their capital in AIFs.

The Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2020 (“PSL Directions”) mandate a portion of bank credit to priority sectors, including social infrastructure. However, these directives may lack adequate allocation for pressing impact areas such as climate change adaptation or circular economy projects.

3 ‘ESG’ is fast emerging as a dominant investment theme both for LPs and fund managers. What are the Environmental, Social and Governance (ESG) standards that investors and asset managers need to be aware of and comply with while building an investment thesis around it?

In India, the only ESG-related regulation is SEBI’s Business Responsibility and Sustainability Reporting (“BRSR”), which is applicable to only the top 1000 listed companies in India. However, other companies may volunteer themselves for BRSR.

With the absence of any ESG-related regulations, it is pertinent to understand that ESG shouldn’t only be looked as a ‘compliance’ requirement, but as something that’s good for business. We have seen that companies that are ESG-proof have the potential to earn a premium in the long-run. Therefore, investors need to invest in making their portfolio companies ESG-proof, rather than adopting a push-down approach to comply with certain ESG norms.

It needs to be understood that the founders of most companies, including in the impact sectors, primarily look at growing their business and achieving business targets. We have especially seen that founders and other key managerial people in impact companies ignore key ESG parameters (very often, governance-related) for achieving larger societal good. This ultimately relates to significant value dilution. The investors should therefore invest in ingraining the value of ESG to founders and other key managerial persons in their portfolio companies, so that they don’t oversee certain ESG regulation, even for the ‘larger good’. In parallel, investors need to build mechanisms for the portfolio companies to report in on various ESG parameters on a periodical basis.

4 Investors have been working to understand and develop a robust monitoring and evaluation framework to assess the impact of their investment portfolio. From your experience, what could be some of the pitfalls, from a compliance perspective, that investors need to be aware of? How could investors build an investment thesis and monitoring framework that reduces the risk of ‘impact-washing’?

To mitigate the risk of 'impact-washing' and build an investment thesis and monitoring framework that ensures genuine impact, investors can take several proactive steps. Firstly, adopting clear sustainability standards or criteria for categorizing investments as sustainable is crucial. Secondly, it's essential for investors to measure and manage the impact of sustainable investments rigorously. Utilizing systematic approaches and methodologies for assessing the expected impact of each investment ensures transparency and accountability. The Nine Impact Principles developed by the International Financial Corporation (IFC) can serve as a guide for evaluating and managing impact across investment portfolios.

Investors should regularly monitor the progress of their investments towards achieving the intended impact. This involves assessing whether investments are meeting their expected impact targets and addressing any deviations or challenges encountered along the way. Monitoring impact progress enables investors to make informed decisions and take corrective actions as needed to maximize positive outcomes. Asking questions about how impact is measured, monitored, and reported can help investors assess the authenticity of sustainable investment options. If investment providers cannot articulate clear criteria or measurement systems, it may indicate potential impact-washing, prompting investors to explore alternative options.

5 How do you see the impact-investing landscape panning out in India, from a regulatory and compliance perspective? What are some of the innovative finance instruments emerging that can inspire more investors to participate in impact focused deals?

2023 witnessed the success of India’s maiden sovereign green bond, and potentially it can pave way for private-sector green bonds. In 2024, the government of India also plans to issue sovereign green bonds worth INR 10,000 crore (~USD 1.2 billion). The issuance of sovereign green bonds showcases the government’s commitment towards the green financing agenda, and we may expect more benefits and regulatory relaxations for investments in the impact sector.

Innovative finance instruments, such as blended finance will continue to be a hot topic of discussion in the investor community. Similarly, we have seen impact bonds, a subset of Blended Finance mechanisms, emerging as an innovative financing tool rooted in the concept of payment by results – which may see more uptake.