Social Impact Fund and the requirements for setting up a fund under SEBI (AIF) Regulations, 2012.

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Social Impact Fund and the requirements for setting up a fund under SEBI (AIF) Regulations, 2012.

December 4, 2023

Introduction

The concept of a social venture fund (“SVF”) was primarily defined and discussed under the Securities Exchange Board of India (Alternative Investment Fund) Regulations, 2012 (“AIF Regulations”). The SVF framework had been established by SEBI (Securities Exchange Board of India) to help bridge the gap between social welfare and opportunities for stakeholders to effectively deploy capital for social ventures. However, under the SVF regime, there were stringent requirements pertaining to minimum investment, the grants available, and the lack of scalable returns for private players.

To combat these difficulties, SEBI introduced the Social Stock Exchange (“SSE”) framework along with the Social Impact Fund (“SIF”) framework through, inter alia, the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2022.

Upon the enforcement of the amendment, as mentioned above, SEBI has relaxed the requirement and compliances for SIFs and investors with an intention to attract private capital into the foray of social welfare. 

Definitions:

To understand the requirements for setting up a SIF, it is imperative to understand the below-mentioned definitions.

1. ‘Board’ means the Securities Exchange Board of India established under Section 3 of the SEBI Act, 1992.

2. A ‘SIF’ has been defined under the AIF Regulations to mean an alternative investment fund which invests primarily in securities, units or partnership interest of social ventures or securities of social enterprises and which satisfies the social performance norms laid down by the fund.[i]

3. AIF Regulations define[ii] an Alternative Investment Fund (“AIF”) to mean any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which: (i) is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and (ii) is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities: provided that, the following shall not be considered as AIF:

  • family trust under the Companies Act, 2013;
  • ESOP under SEBI regulations or Companies Act, 2013;
  • employee welfare trust or gratuity trust;
  • holding companies as defined under the Companies Act, 2013;
  • other special purpose vehicle not established by fund managers; 
  • funds managed by a securitization company or reconstruction company, and such company is registered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and
  • any pool of funds regulated by any other regulator within India. 

4. ‘Social units’ under AIF Regulations mean a unit issued by a SIF or under a scheme of SIF to investors who have agreed to receive only social returns or benefits and no financial returns against the contributions made by such investors.[iii]

5. A ‘social venture’ means a trust, society, or venture capital undertaking or limited liability partnership formed with an intent to promote social welfare, provide social benefits, or tackle societal problems, and it includes:

  • public charitable trusts registered with the Charity Commissioner (as under applicable laws);
  • societies registered for charitable purposes or for promoting science, literature, or fine arts;
  • company registered under Section 8 of the Companies Act, 2013;
  • microfinance institutions.

6. ‘Manager’ means any person or entity who is appointed by the Alternative Investment Fund to manage its investments by whatever name called and may also be same as the sponsor of the Fund.[iv]

7. ‘Sponsor’ means any person or persons who set up the Alternative Investment Fund and includes promoter in case of a company and designated partner in case of a limited liability partnership.[v]

Requirements to set up a Social Impact Fund:

Any entity intending to act as an AIF shall statutorily obtain registration under the AIF Regulations.[vi] Furthermore, the AIF Regulations provide for three categories under which an AIF can seek registration. For this note, we shall examine the concept of registration as a Category I AIF, as a SIF falls under ‘Category I Alternative Investment Fund’.

A Category I Alternative Investment Fund is a fund which invests in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social impact funds, infrastructure funds, special situation funds and such other Alternative Investment Funds as may be specified.[vii] 

Procedure for obtaining registration:

A SIF shall make an application for a grant of certificate in Form A in a format as provided under the AIF Regulations along with a payment of a non-refundable application fee in a manner as laid down under Part A and Part B of the AIF Regulations.[viii] Further, the certificate of registration granted to an AIF shall be valid till such AIF winds up its operations.

Eligibility criteria for registration:

In furtherance to the above, the Board before granting the certificate of registration ensures that the applicant satisfies the eligibility conditions as laid down below:[ix]

(i) the memorandum of association in case of a company; or the trust deed in case of a trust; or the partnership deed in case of a limited liability partnership permits it to carry on the activity of an AIF;

(ii) the applicant is prohibited by its memorandum and articles of association or trust deed or partnership deed from making an invitation to the public to subscribe to its securities;

(iii) in case the applicant is a trust, the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Registration Act, 1908;

(iv) in case the applicant is a limited liability partnership, the partnership is duly incorporated, and the partnership deed has been duly filed with the registrar under the provisions of the Limited Liability Partnership Act, 2008;

(v) in case the applicant is a body corporate, it is set up or established under the laws of the Central or State Legislature and is permitted to carry on the activities of an AIF;

(vi) the applicant, Sponsor, and Manager are fit, and proper persons based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008;

(vii) The key investment team of the Manager of the AIF has –

(a) adequate experience, with at least one key personnel having not less than five years of experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling, and dealing of securities or other financial assets; and

(b) at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market, or banking from a university or an institution recognized by the Central Government or any State Government, or a foreign university, or a Chartered Financial Analyst (CFA) charter from the CFA institute or any other qualification as may be specified by the Board:

(c) Provided that the requirements of experience and professional qualification as specified in regulations 4(g)(i) and 4(g)(ii) of the AIF Regulations may also be fulfilled by the same key personnel.

(viii) the Manager or Sponsor has the necessary infrastructure and manpower to effectively discharge its activities;

(ix) the applicant has clearly described at the time of registration the investment objective, the targeted investors, the proposed corpus, investment style or strategy, and the proposed tenure of the fund or scheme;

(x) whether the applicant or any entity established by the Sponsor or Manager has earlier been refused registration by the Board.

Investment in a SIF:

A social impact fund or a scheme of social impact fund has the option of issuing social units or issuing units, to an Indian national, foreigner, or non-resident Indian to raise funds for fulfilling its objectives.[x] However, SIF can raise funds for a particular scheme, only if the corpus for such scheme is a minimum of Rs. 5,00,00,000/- (Rupees Five Crores Only).[xi]

In accordance with the proviso to Regulation 10(c)[xii], the minimum value of investment in the SIF by an individual investor shall be a minimum of Rs. 2,00,000/- (Rupees Two Lakhs Only), provided the SIF invests only in securities of a not-for-profit organization registered or listed on the social stock exchange. Contrastingly, if the SIF is investing in a not-for-profit organization not listed on the social stock exchange, the minimum investment value of an investor in the SIF would be Rs. 1,00,00,000/- (Rupees One Crore Only).[xiii]

Furthermore, the Manager or Sponsor shall have a continuing interest in the AIF of up to two and a half percent (2.5%) of the corpus or five crore rupees, whichever is lower, in the form of investment in the AIF and such interest shall not be through the waiver of management fees (which shall be separately charged against the services provided by the Manager or Sponsor, as the case may be). To further strengthen the involvement of the Manager or the Sponsor, the Manager or Sponsor is required to disclose their investment in AIF to other investors as well.[xiv]

In addition to the above, the AIF shall solicit and/ or collect funds only through private placement, and have a maximum of one thousand investors, However, if the AIF is created as an entity under the Companies Act, the provisions of the Companies Act with respect to private placement shall apply to such AIF.[xv]

Tenure:

The SIF shall be a close-ended fund which shall determine its tenure at the time of applying, provided the minimum tenure is three (03) years.[xvi]

However, if an SIF, which is a close-ended fund, can extend its tenure up to a maximum period of two years, provided two-thirds (by the value of their investment) of the unit holders approve such extension.[xvii] In a situation where the unit holders do not provide their consent for extension, the SIF shall liquidate within one year following the expiration of their original or extended tenure, as the case may be.[xviii]

The contents of this note are limited to the eligibility criteria, the procedure for obtaining registration as a social impact fund, and the minimum investment in an SIF under the AIF Regulations. The AIF Regulations further discuss, among other things, the conditions under which a social impact fund can invest the monies pooled from various investors, the conditions for investing in entities listed on the social stock exchange, and the guidelines for transparency and disclosure.


[i] Regulation 2(tb), SEBI (Alternative Investment Fund) Regulations, 2012.

[ii] Regulation 2(b), SEBI (Alternative Investment Fund) Regulations, 2012.

[iii] Regulation 2(td), SEBI (Alternative Investment Fund) Regulations, 2012.

[iv] Regulation 2(q), SEBI (Alternative Investment Fund) Regulations, 2012.

[v] Regulation 2(w), SEBI (Alternative Investment Fund) Regulations, 2012.

[vi] Regulation 3(1), SEBI (Alternative Investment Fund) Regulations, 2012.

[vii] Regulation 3(4)(a), SEBI (Alternative Investment Fund) Regulations, 2012.

[viii] Regulation 3(5), SEBI (Alternative Investment Fund) Regulations, 2012.

[ix] Regulation 4, SEBI (Alternative Investment Fund) Regulations, 2012.

[x] Regulation 10(a), SEBI (Alternative Investment Fund) Regulations, 2012.

[xi] Regulation 10(b), SEBI (Alternative Investment Fund) Regulations, 2012.

[xii] Proviso to Regulation 10(c), SEBI (Alternative Investment Fund) Regulations, 2012.

[xiii] Regulation 10(c), SEBI (Alternative Investment Fund) Regulations, 2012.

[xiv] Regulation 10(d) and Regulation 10(e), SEBI (Alternative Investment Fund) Regulations, 2012.

[xv] Regulation 10(f) and Regulation 10(g), SEBI (Alternative Investment Fund) Regulations, 2012.

[xvi] Regulation 13, SEBI (Alternative Investment Fund) Regulations, 2012.

[xvii] Regulation 13(5), SEBI (Alternative Investment Fund) Regulations, 2012.

[xviii] Regulation 13(6), SEBI (Alternative Investment Fund) Regulations, 2012.

Author: Shubham Tibrewala, Associate

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at info@samistilegal.in

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