By Ankita Srivastava

Rules to boost and encourage social business projects through CSR funding have not seen the light of the day in the CSR provisions of the Companies Act, 2013 that came into effectin April 2014. Thisomissionin the CSR Rules reflects both short-sightedness and lack ofunderstanding on the part of the governmentof the potentially positive impact that the convergence of CSR and social business could have created.

An attempt was initially made in the draft CSR Rules to provide a conducive atmosphere for corporates to develop and incubate new forms of business practices aimed at leveraging the far-reaching effects of the market to advance socio-economic development. “Social Business Projects” was one of the activities enumerated in Schedule VII under the draft CSR Rules.

The quality and quantity of investment that we are witnessing within the growing social business space is evident from the many social entrepreneurs and industry leaders in India who have adopted social business practices to bring about sustainable change. This model, developed byMohammed Yunus (famed Grameen Bank founder and microcredit pioneer) inspired many entrepreneurs to plunge into the impact-based model of funding to create new and innovative forms of social businesses. The draft CSR Rules gave fillip to such entrepreneurs as the market began to realize the positive policy implications of synchronization between government prescribed economic policies and market led investment opportunities.

With the introduction of “social venture funds” which invests primarily in securities or units of social ventures providing restricted returns and the recently approved “Alternative Investment Fund” regime in India(pooling of investment funds from Indian and foreign investors( subject to the various approvals), many corporate stakeholders were hoping that the CSR Rules would encourage convergence of market-led investment models built around social impact projects and investment opportunities based on CSR spending.

It was largely expected that companies would be allowed to invest their CSR-dedicated funds in social business projects based on the principle of muted return in order to allow greater visibility and sustainability of CSR programs. CSR spending through investment in social venture funds could have been useful in promoting innovation and new business solutions as well as providing seed funding and incubation of breakthrough ideas and social enterprises. The credit crunch faced by social businesses could have been comfortably addressed given that the estimated aggregate amount of CSR funding for one financial year is expected to be about $1 billion.  Companies could have efficiently met theirobligation to spend two percent of their revenue on CSR activities had the Rules permitted them to devote those resources to social venture funds which have already demonstrated success with market driven policies for the benefit of all stakeholders satisfying the social performance norms.

However, the removal of “social business” projects from Schedule VII casts doubt on policy-makers’ understanding of, or possibly commitment to, the goal of CSR. Government policy makers, for reasons that are not obvious, seem to have been trapped by a conventional and outdatedunderstanding of CSR asphilanthropy. Schedule VII of the recently enacted CSR Rulesreveals that government policy makers failed to appreciate that permitting CSR funds to be directed to social business purposes would have realized in the most efficient way the legislative purpose of the CSR.  That purpose is implementation of effective social policy by innovative and efficient use of capital.  By excluding social business from CSR activities, the government lost arare opportunity to address India’s widespread social problems and improve the lives of its citizens in an efficient, effective, stakeholder-driven and financially sustainableway.

Ankita Srivastava is a lawyer with Nishith Desai Associates in New Delhi.  She can be reached at ankita.srivastava@nishithdesai.com.