TOPIC: NIDHI COMPANIES

SUBJECT: CORPORATE LAW

FACULTY: DR. DAYANAND MURTHY C.P.

BY: ANUSHA RAO THOTA

ROLL NUMBER: 2017099
SEMESTER – VI

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Table of Contents

Introduction..............................................................................................................................4
Alternative investment fund....................................................................................................5
Social Venture Capital Funds.................................................................................................7
Laws Relating to Social Venture Funds in India...................................................................8
Characteristics of Social Venture Funds................................................................................8
Alternate Investment Fund Regulations.................................................................................9
Social Venture Fund-I (Outcome Funding Model)..............................................................11
Social Venture Funds – II (Socially Responsible Investing)...............................................12
conclusion................................................................................................................................13

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Lit review

The Global Epicenter of Impact Investing: An Analysis of Social Venture Investments in

India

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 INTRODUCTION
Like the name implies, social venture capital funds finance businesses that have a positive
effect on people while still providing investors with a fair return. Since the fund manager is
required to analyse the social benefit generated by companies, they are often referred to as
impact funds. A social venture capital fund must invest at least 75% of its assets in
companies that have a positive impact on society, according to SEBI guidelines. This
distinguishes them from venture capital funds, which are primarily concerned with risk and
reward.

Financial inclusion, accessible healthcare, renewable energy, education, and agriculture are
popular themes for social venture capital funds in India. These funds put money into early-
stage start-ups in this industry. They provide seed funding as well as organisational and
technological assistance to help start-ups establish their businesses and establish governance
and regulatory procedures. They can also have business contacts and assist them in obtaining
additional funds for expansion. Once the company they invested in has established itself,
these funds will decide to leave the firm. The portfolio manager's exit plan, on the other hand,
varies.

The waterfall mechanism is used to divide returns from social investment funds between
donors and the fund. The capital as well as a certain minimum benefit, known as the hurdle
rate, are spread to investors first. Any excess gains are split between participants and the fund
management team according to the terms specified in the scheme details sheet.

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For a long time, social venture capital funds have existed. Lok Capital, Aavishkaar Venture
Management, Elevar Equity, and Menterra Venture Advisors have all been in business in
India for a long time. SEBI listed social enterprise funds as Category 1 AIFs in 2012.
(alternative investment funds). Ankur Capital, Unitus Ventures, and Planner India are among
the companies that have launched a category 1 AIF social venture fund.

These funds are structured similarly to other tier 1 AIFs. They need a minimum investment of
Rs.1 crore and a three-year lock-in period with a two-year extension option. For managing
the fund, fund managers can charge about 2% annual fund management fees.

NGOs and socially aware HNIs and UHNIs are likely to be involved in investing in these
funds. Responsible investments is picking up on a global scale. These funds should be
recommended to the high-net-worth and ultra-high-net-worth clients who choose to invest in
social enterprises. As part of their CSR programmes, you can even refer these funds to
corporate customers.

While they exist in reality, social investment funds were only officially recognised under the
AIF Regulations. A social venture fund is described as a "alternative investment fund that
invests primarily in securities or units of social ventures and that satisfies the fund's social
performance norms and whose investors can consent to earn restricted or muted returns"
under the AIF Regulations.

ALTERNATIVE INVESTMENT FUND

Alternative Investment Funds AIF pool money from sophisticated private investors. Funds
collected are invested according to the investment policy of the AIF. Securities and Exchange
Board of India‘s mutual fund regulations doesn’t govern AIFs. However, AIF in India has its
regulation, Regulation 2 (1) (b) of the Regulation Act, 2012 of SEBI. An AIF in India can be
established as a company, Limited Liability Partnership (LLP), corporate body, or trust.

AIFs invest in investments that are not traditional (for example, equities or fixed income).
Securities and Exchange Board of India classifies AIFs under three broad categories. Namely,
Category I AIF, Category I AIF and Category III AIF. Each of the categories has different
investments as per the broad definition of the category. Some of them are private equity,
venture capital, hedge fund, and angel fund etc.

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The minimum investments and fees for AIFs are higher than conventional investments. It is
difficult to value an AIF as the asset classes that they invest in are pretty rare. AIFs are
illiquid as these investments are open only to limited investors. The transaction costs for AIFs
are lower than traditional investments as the turnover is lower. AIFs don’t share any
information relating to the fund publicly. Also, AIFs have less opportunity to advertise to
potential investors.

What are the sorts of Alternative Investment Funds in India?

Securities and Exchange Board of India (SEBI) sorts Alternative Investment Funds into three
general classifications. Financial backers can decide to enlist in any of the accompanying
three classes and subcategories thereof.

Category I AIF:

• Venture Capital Funds

• Angel Funds • SME Funds

• Social Venture Capital Funds

• Infrastructure funds

Category II AIF

• Private Equity (PE) Funds

• Real estate Funds

• Funds for distressed assets

• Debt Funds

• Funds of Funds

• Category III AIF

• Hedge Funds

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• Private Investment in Public Equity Funds (PIPE)

Category I AIF’s Category I AIFs put resources into new businesses or beginning phase
ventures or SMEs or social ventures or foundation or different areas. The public authority or
controllers consider these areas as financially and socially attractive.

SOCIAL VENTURE CAPITAL FUNDS

As the name recommends, social venture capital funds give subsidizing to organizations that
emphatically sway lives. These organizations likewise offer sensible re-visitations of their
financial backers. In addition, these funds are most normally known as effect funds. The asset
chief of these funds examinations the social effect the business makes on society.1

Following are a portion of the critical highlights of Social Venture Capital Funds:

 Minimum investment of INR 1 crore.

 Lock-in time of three years, with a choice to stretch out for a very long time.
 The reserve needs to contribute at least 75% of the resources in organizations that
have a positive social effect.

Generally, SVCFs do subject based putting resources into India. For instance, schooling,
moderate medical care, agribusiness, and clean energy.

Notwithstanding seed investment, social venture funds likewise offer specialized and
operational help to organizations. They likewise help in setting up the business, setting down
consistence and administration techniques. Likewise, if fundamental, they offer business
associations and help in getting further subsidizing.

Financial backers and the asset share the profits from the social venture reserve. They follow
the cascade instrument. According to this component, initially, the capital and hurdle rate is
circulated among the financial backers. The hurdle rate is the base profit that is given. The
overabundance returns are then disseminated according to the terms in the plan data archive.

1
4Koh, H., A. Karamchandani, and R. Katz. From Blue- 17Community Capital New York (January 2013), The
Case for Philanthropy in Impact Investing." The Monitor Group, 2012.

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LAWS RELATING TO SOCIAL VENTURE FUNDS IN INDIA

Offshore social venture funds, like traditional venture capital funds, pool capital (and grants)
from outside India and invest in India. Due to the possibility of regulatory approval, certain
offshore funds will not be able to make direct grants to otherwise deserving Indian
opportunities.

Under the unique subcategory of social venture funds, onshore social venture funds must be
registered as Group I AIFs. In addition to meeting the requirements outlined in the
specification (described above), social venture funds are subject to the following limitations
and conditions under the AIF Regulations:

Requirement that they spend at least 75% of their investable assets in unlisted shares or joint
interests in ‘social projects.'2

 Allowable to accept and provide grants (as long as they comply with the above
investment restriction). If the social venture fund is considering offering grants,
relevant disclosure in the fund's placement memorandum would be required.
 It is permissible to earn muted returns.

CHARACTERISTICS OF SOCIAL VENTURE FUNDS

Not only in terms of the contributions they make, but also in terms of the guarantees they
obtain from their limited partners / donors, social venture funds vary from venture capital and
private equity funds. A summary of some of the characteristics that a social investment fund
could have is as follows:

 Investors who make grants rather than contributions (with no promise of a return);
 The Fund awards grants and capital funding based on the socioeconomic value of
such engagement rather than only returns on investment.

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10. Regulation 2(1)(u) of the AIF
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  The Fund's management team is mentoring, "incubating," and growing their portfolio
companies, resulting in limited token investments (similar to a seed funding amount)
with additional capital infused when and when the portfolio grows;
 The Fund's management team is participating in mentoring, "incubating," and
growing their portfolio companies, resulting in limited token investments (similar to a
seed funding amount) with additional capital infused when and when the portfolio
grows;

Environmental, infrastructure, and socially important industries are also popular targets for
social investment funds, since they have an immediate impact on the geographies where their
portfolio companies work.

ALTERNATE INVESTMENT FUND REGULATIONS

An alternative investment fund ("AIF") is a pooled investment vehicle which gathers funds
from financial backers, regardless of whether Indian or unfamiliar, for putting it as per a
characterized investment strategy to serve its financial backers. Social venture funds
("SVFs") are secretly pooled investment vehicles set up to advance social government
assistance or taking care of social issues or giving social advantages.3

AIFs, including SVFs, are managed by Security Exchange Board of India (SEBI) under the
SEBI (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations"). Being private
investment vehicles set up for a social reason, the AIF Regulations permit SVFs to give
quieted or nil gets back to financial backers, and likewise license them to get and send awards
for downstream investments in social ventures.4

AIFs have prepared a lot of cash for investment into India. Category II AIFs have raised
responsibilities to the tune of INR 1.3 lakh crore as of June 30, 2018. Category I AIFs have
raised responsibilities of INR 28,717 crore as of a similar date, with SVFs raising INR 1,133
crore of such aggregate. Different AIFs, including non-SVFs, are occupied with advancing
social government assistance projects in India. While the investment program of AIFs is the
right of the investment chief, by and by, it is often seen that such program is vigorously

3
Regulation 2(v) of SEBI (AIF) Regulations
4
Regulation 16 of the SEBI (AIF) Regulations:

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impacted by benefactors through the arrangements went into regarding commitment to the
AIF.

AIFs consequently, could subsequently introduce an appropriate road for companies

undertaking CSR exercises to channel investments into socially valuable ventures and
guarantee consistence through courses of action which are eventually under the domain of a
legal controller for example SEBI. Accordingly, the current CSR structure ought to be
corrected to permit CSR funding to AIFs fundamentally putting resources into social ventures
(as perceived under the AIF Regulations). In this regard, it is desirable over give such
recompense in regard of all Category I and II AIFs with an investment program principally
centered around friendly ventures, This can guarantee a more prominent progression of
funding to social government assistance projects since, as talked about above, Category I
AIFs other than SVFs and Category II AIFs have truly (and as might be normal going ahead
as well) raised a lot more noteworthy responsibilities than SVFs.

For all such AIFs, the Fund and the investment administrators might be bound, through
suitable fund reports, to stick to the important strategy on the off chance that they
acknowledge funding from companies from their CSR financial plans. An equal is found in
the protection business, wherein the Insurance Regulatory and Development Authority of
India ("IRDA") has specified that Category II AIFs which acknowledge investments from
back up plans (controlled by the IRDA) ought to contribute at least 51% of their funds in
foundation elements, little and medium endeavors, venture capital endeavors or social
venture entities.5 Typically, this necessity is fused in fund documentation by safety net
providers while entering commitment arrangements or related fund records, subsequently
restricting the investment administrator and the AIF.

Nonetheless, explicitly concerning receipt of awards by SVFs, more prominent administrative

lucidity would be welcome on not many notable perspectives (examined here). While
authorization in such manner has been in truth, the regulations are not exceptionally clear on
the transaction between an award and an investment with a quieted return and what each
ought to comprise. Further, there is an administrative vulnerable side between the AIF
Regulations, the Foreign Contribution Regulation Act, 2010 (FCRA) and the Income Tax
Act, 1961 ("ITA"). While the AIF Regulations permit SVFs to get awards, both from

5
Paragraph 1.5 (Investment in Alternative Investment Fund), Investments – Master Circular, IRDAI
(Investment) Regulations, 2016

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homegrown just as unfamiliar sources, the arrangements of the FCRA unmistakably express
that no unfamiliar commitments can be gotten by any association in India without taking
explicit endorsement from the Ministry of Home Affairs ("MHA").6

Thus, notwithstanding SVFs being simply controlled under the AIF Regulations for the
reasons for accepting awards and making investments utilizing such awards, the
arrangements of FCRA just imagine non-profit elements to get unfamiliar awards.
Significantly under the arrangements of ITA, regularly just non-profit substances are
considered as viable vehicles to get awards, while AIFs ordinarily are revenue driven Special
Purpose Vehicle (SPVs). Accordingly, there are sure non-unions between the arrangements
of the AIF Regulations, the ITA and the FCRA in regard of receipt of unfamiliar and/or
domestic awards, and its application thereof.

SOCIAL VENTURE FUND-I (OUTCOME FUNDING MODEL)

A Social Venture Fund is established and run by a fund manager in this model. Units of the
SVF are purchased by risk investors in India and abroad. The SVF invests in social ventures
or offers financing to service providers (in consultation with risk investors) that can help
achieve the desired result for individual programmes through captive investments. If the

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Section 11 of the FCRA

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result has been tested, outcome funders in India will make funding to the SVF, and offshore
funders will make funding to captive institutions, which will upstream the returns to
investors.7

The key benefits of this structure are that it allows for the pooling of funds from a variety of
cost and result funding sources. As a result, when opposed to a basic SIB model, which is
more tailored to a project-specific relationship between restricted parties, the size of effect
that can be reached across such a platform increases considerably.8

The key drawback is that the resources involved must be substantial in order to justify the
costs of establishing this arrangement. Second, this revolutionary funding mechanism
contains some novel elements that, from a business standpoint, affect investors or social
ventures could need assurance that it will not be contested by any tax or regulatory
authorities. There are no precedents that prove that such a model has been proven to function
consistently and it is the first of its kind structure.

SOCIAL VENTURE FUNDS – II (SOCIALLY RESPONSIBLE INVESTING)

7
Thillairajan, A. "A Lifecycle Analysis of VC-PE Invest- ments in India." The Journal of Private Equity, Winter
2010, pp. 72-82.
8
4Koh, H., A. Karamchandani, and R. Katz. From Blue- 17Community Capital New York (January 2013): The
Case for Philanthropy in Impact Investing." The Monitor Group, 2012.

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A Social Venture Fund is established and run by a fund manager in this model. Units of the
SVF are purchased by risk investors in India and abroad. The SVF invests this money in a
section 8 corporation that would operate a hospital or an educational institution. A captive
service LLP will be established by the SVF to provide management services to the business.
This is usually the latest variant on the market, without the SVF.9

Advantages: The primary benefit of this model to the current market structure is that, while
investors will mostly be paid returns from the profits generated by the Section 8 company and
the Service LLP together, subject to payment of applicable taxes, they will still have access to
additional outcome funding if they can meet those outcome funding requirements. For the
parties concerned, this is expected to increase returns and outcomes dramatically.

The key drawback is that the resources involved must be substantial in order to justify the
costs of establishing this arrangement. Second, this revolutionary funding mechanism
contains some novel elements that, from a business standpoint, affect investors or social
ventures could need assurance that it will not be contested by any tax or regulatory
authorities. There are no precedents that prove that such a model has been proven to function
consistently and it is the first of its kind structure. Furthermore, although it may be simpler to
start from scratch, incorporating existing models into this model may be difficult.

CONCLUSION

One monetary advancement that can be a gamechanger for the social area is a social venture
fund (SVF). A kind of alternative investments fund (AIF) allowed by India's securities
controller, the Securities and Exchange Board of India (SEBI), a SVF is an intermediated
structure that can get funds from contributors and financial backers, who are given units in
exchange. Similar as a shared fund, it is overseen by a professional fund administrator, who
then 'contributes' the funds. The distinction being that a SVF can put resources into securities
gave by social area associations, including non-profit associations (NPOs). Not at all like
other AIFs, the construction of a SVF permits it to get awards close by business capital and
dispense them. Curiously, while SVFs have been permitted since 2012, no non-profit

9
Thillairajan, A., and V.P. Kamat. "The Tigers and Their Stripes: Types of VC Firms and Their Investment Pat-
terns in India." The Journal of Private Equity , Spring 2012, pp. 63-74.

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centered SVF dispatched in India up until now. To begin with, it opens the advantages of an
aggregate award making element that is overseen by a professional 'fund chief'.

For benefactors, it offers a chance to find better or lesser-known NPOs through a specialist
funder supervisor. This is tantamount to how an overall accomplice helps restricted
accomplices in the venture capital/private value world. It is savvy, as it restricts the
requirement for givers to have their own in-house groups and space skill to industriousness
grantees. It empowers admittance to an enormous NPO pool without the requirement for on-
ground presence, which is particularly valuable for unfamiliar humanitarian funders.

For NPOs, it expands the pools of capital by swarming in new funders and brings down
overheads and revealing prerequisites. This is on the grounds that they need to manage the
administrator of the aggregate substance, and not with singular contributors. This frees NPOs
from the weight of answering to various givers in various configurations and revealing cycles
and opens up a greater amount of their hierarchical psyche space to zero in on their central
goal. For the non-profit area in general, it empowers the making of new expansive freedoms
for sway at a scale, which may somehow not occur, for example, enormous aggregate
endeavors around explicit causes like juvenile young ladies, movement, and so forth

Yet, the advantages of setting up a managed SVF go past that of any conventional aggregate
award making substance. The 'trust-mark' that accompanies being a directed substance gives
more noteworthy certainty to new non-customary funders. The administrative umbrella of
SEBI acquires more noteworthy believability and responsibility and additionally limits the
view of peculiar dangers related with a non-controlled, conventional award supervisor.

The SEBI working gathering (WG) on the social stock exchange (SSE) makes the SVF idea a
stride further. It suggests that the units gave by SVFs ought to be recorded on the visualized
SSE, given that the beneficiaries of these funds focus on revealing their social effect
execution on the SSE in standardized divulgence designs proposed by the WG. Posting on the
SSE will, accordingly, empower more prominent lucidity on the "what" and the "how" of the
effect made, utilizing standardized structures. Over the long run, the accessibility of data on
the effect execution of different NGOs can help well-performing NPOs raise more capital and
scale up their work, and boost the fulfillment of effect objectives.

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Setting up the originally managed, non-profit centered 'SSE-recorded' SVF can be a
significant achievement for India's non-profit area. It could turn into a layout of sorts that can
be imitated to make an extra fundraising course for non-profits.

We accept that the SVF development could be as critical to the non-profit area, as common
funds have been to financial backers, who would now be able to take an interest in monetary
business sectors without setting up in-house groups to do stock-picking. The onus is currently
on the public authority, SEBI and the previously set of strong funders to hold onto the second
and make this a reality.

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