India

The most commonly used organizational form for For-profit corporate organizations is a company incorporated under the (Indian) Companies Act, 2013 (Companies Act). A company could be a Private Limited Company (PLC), a Public Limited/Publicly Listed Company, a one person company, a not-for-profit company, a Producer Company or a small company (to name the most common structures).

•  PLCs can be incorporated with a minimum of 2 shareholders and 2 Directors (including 1 resident Indian director). Transfer of shares of private limited companies is restricted, and such companies cannot raise capital from the public.
• On the other hand, public companies need a minimum of 7 persons to be incorporated. Securities of public companies are freely transferable, subject to contractual restrictions, if any, between the shareholders, and they are permitted to raise capital from the public.
  • Public limited companies are generally subject to stricter levels of compliance requirements, and in case such companies have their securities listed on stock exchanges, such companies have to additionally comply with regulations prescribed by the Securities Exchange Board of India (SEBI).

a. Investors typically prefer to have a PLC structure for their investee companies, as it is the most suitable structure when there are a limited number of investors/shareholders involved.

• Further PLCs offer certain advantages such as imposing restrictions on the transfer of securities by investors/shareholders. The structuring of different classes of securities and compliance requirements in a PLC is also relatively easier as compared to public companies and hence are favored by For-profit Enterprises seeking financing from investors.

b. While the PLC is the most common organizational form, Social Enterprises may take other For-profit organizational forms, such as partnership firms, Limited Liability Partnerships (LLPs), sole proprietorships, Non-Banking Financial Companies (NBFCs), Producer Companies, or Branch Offices/Liaison Offices of a foreign company. (Typically, branch offices/liaison offices are set up to pursue a limited purpose.)

In terms of the Companies Act, the directors of a company are required to act in good faith to promote the objects of the company for the benefit of its members, and should act in the best interest of the company, its employees, its shareholders, the community and for the protection of the environment.

There are no organizational forms specifically designed for Social Enterprises.

a. Social Enterprises may exist as any type of For-profit companies or Nonprofit organizations and may make use of government benefits available for the specific organizational form or for their sector of operation. The features of Nonprofit Social Enterprises are explained in greater detail in Part I.(5). In a lot of cases, For-profit Social Enterprises may organize as Startup or as Producer Companies (primarily for agrarian activities and cottage industries like handlooms and handicrafts). Both these types of organizations are governed by the Companies Act.

• For-profit Social Enterprises that can be classified as Startups are entitled to tax and regulatory benefits (detailed in Parts III and IV). Please note that the Startup India Policy, 2016 defines Startups as PLCs, partnership firms or LLPs that are not more than 10 years old; or not having an annual turnover exceeding INR 1,000,000,000 [USD 13.9 million approx.], or entities “working towards innovation, development or improvement of products or processes or services, or…[having] a scalable business model with a high potential of employment generation or wealth creation.”
• Producer Companies exist to facilitate the establishment of cooperative businesses as companies, and members can only be persons engaged in an activity connected with or related to primary production.

b. The Startup India Policy makes no distinction between Social Enterprises and other kinds of Enterprises.

• Under the Companies Act, Producer Companies are a structure enabling cooperatives of farmers or other types of producers to function as a corporate body. They are distinct from traditional Enterprises in that only those persons who are connected to the activity of primary production related to agriculture or to handlooms, handicrafts and cottage industries can be members of such a legal entity.

c. Owing to the manner in which the Startup India Policy defines Startups, many young Social Enterprises get the benefit of being considered as Startups and receive tax benefits under the said policy(detailed in Part III.(1)).

• Producer Companies ensure the welfare of the members of the company in the way a cooperative would, while also having the regulatory framework of a traditional Enterprise. For instance, members can earn a patronage bonus (akin to dividends) after the approval of annual accounts.
• As a result of recent amendments to the Companies Act in January 2021, both Startups and Producer Companies are now subject to less severe penalties than PLCs and Publicly Listed Companies for offences under the Companies Act. The Companies Act empowers Startups and Producer Companies to pay only half the amount of the standard penalties payable in the event of a non-compliance. Additionally, the penalties for Startups and Producer Companies are capped at INR 200,000 [USD 2,740 approx.] for a defaulting company and INR 100,000 [USD 1,370 approx.] for a defaulting officer of the company.
• Recently, the Central government has also announced a series of proposals to boost the Startup ecosystem in India. Some of these include allowing one person companies (needing only one person to be incorporated) to incorporate without any minimum requirements of paid-up share capital or turnover; allowing such companies to convert into any other type of company (such as a PLC or Publicly Listed Company) at any time; and allowing Non-Resident Indians to incorporate such companies in India.

d. There are no restrictions on the use of Startups compared to traditional Enterprises. However, Producer Companies differ from traditional Enterprises in requiring members to be primary producers and also barring public trading of members’ equity. 

e. There are no material differences in timing or cost for Social Enterprises compared to a traditional Enterprise.

f.  Both For-profit and Nonprofit Social Enterprises are reasonably prevalent and well-known in India. All these organizational forms have been in existence for a long time.

Social Enterprises are permitted to be formed and operated as Nonprofits in India in the form of trusts, societies, and not-for-profit companies.

a. Nonprofits that are Social Enterprises are not treated differently in the law as compared to nonprofits that are not Social Enterprises.

b. There is no material difference in benefits or restrictions to Social Enterprises that use a Nonprofit form and other types of Nonprofits.

c. Indian law doesn’t contemplate any hybrid types of Nonprofits. Sometimes, Social Enterprises incorporate both For-profit and Nonprofit structures with two entities in place – a For-profit entity (such as a PLC) and a Nonprofit entity (such as a not-for-profit company). This model allows the Social Enterprise to gain the best of both worlds in terms of accessing Corporate Social Responsibility (CSR) funds, foreign grants, government grants, traditional funding sources etc., through the Nonprofit Entity. The key drawback to this model is the inability to maintain a common culture for both entities, and the need to consistently ensure that regulatory action is not triggered under applicable laws.

d. Where their business objects are charitable in nature, Social Enterprises in India may also form as Nonprofits. Nonprofits receive primary funding from foundation grants, in-kind aid and donations. However, studies show that  For-profit Social Enterprises are the most widely adopted, while Nonprofit Social Enterprises and hybrid models tend to be less common than For-profits(detailed above), usually because of easier investment access and ease of operation for For-profit Social Enterprises.

• However, please note that Nonprofit Social Enterprises are treated very differently from For-profit Social Enterprises.
  • Benefits of Nonprofit Social Enterprises as opposed to For-profit Social Enterprises: (i) allowed to receive CSR funding from corporations; (ii) exempt from income tax; and (iii) donors can claim tax rebates for donations made to Nonprofits.
• Restrictions on Nonprofit Social Enterprises compared to For-profit Social Enterprises: (i) no special government benefits by virtue of being a Nonprofit, (ii) relatively limited ways of securing funding; and (iii) profits must be reinvested into the purposes for incorporation only.

Yes, community-based and individual-based cooperative societies are a model of operation for Social Enterprises in India. Cooperative societies in India are typically governed by state-specific legislation, except cooperative credit institutions (which are governed by the Reserve Bank of India). Cooperatives primarily benefit the workers by way of ownership, control, alignment of financial interests, and the availability of economies of scale as compared to individual initiatives (since they are community-driven and focus on the common good).

• Benefits: Cooperatives receive financial assistance from the Central government’s schemes specially designed for them, such as a dedicated investment fund for cooperative societies, and a refinancing assistance plan for cooperative credit institutions offering agricultural credit.
• Restrictions: One major disadvantage for cooperatives is their inability to attract capital investment from outside investors given their poor internal governance and management mechanisms, and a scarcity of professional expertise, internally.

There are no unique reporting requirements for For-profit Social Enterprises distinct from other traditional corporations. Typically, all corporations must comply with the regulations on foreign investments, submit annual reports to the Registrar of Companies, file tax returns etc.

Additionally, if a Social Enterprise decides to form as a Nonprofit instead of a For-profit organization, they are also required to file returns with the Central government about their utilization of foreign contribution, if any is received.

There is jurisprudence upholding the ability of both For-profit and Nonprofit Enterprises to undertake activities for a ‘charitable purpose’, subject to certain conditions being met. The Supreme Court of India in 2014 has clearly delineated the meaning of ‘charitable purpose’ for the purposes of obtaining tax exemptions available to income earned through charitable activities. For an activity to be considered charitable, it should (i) be for the advancement of general public utility; (ii) not involve any activity or services in relation to trade, commerce and business; (iii) not be for a profit motive. (Whether or not the pursuit of such a charitable activity would qualify the Enterprise for tax exemptions depends on the Enterprise’s main objects and the amount of money received from non-charitable activities.)

However, there is no specific definition of For-profit Social Enterprises in Indian jurisprudence.

Yes. The Companies Act requires every company having a net worth of INR 5,000,000,000 [USD 66.66 million approx.] or turnover of INR 10,000,000,000 [USD 133.34 million approx.] or more or a net profit of INR 50,000,000 [USD 666.67 thousand approx.] or more during the immediately preceding financial year to constitute a CSR Committee which in turn will formulate a CSR Policy which will indicate the social responsibility activities to be undertaken by the company, such as ensuring environmental sustainability, ecological balance, promoting education, eradicating hunger, poverty etc.

Further, the top 1000 listed entities based on market capitalization (calculated as of March 31 of every financial year) are required to include a business responsibility report describing initiatives taken by them from an environmental, social and governance perspective in their annual report.

No specific ESG requirements are specified for Social Enterprises, however, all enterprises requiring environmental impact clearance, as part of the environment impact assessment of their project to commence their operations are required to undertake corporate environmental responsibility (“CER”) payments. Further, companies meeting the CSR threshold are expected to undertake projects aimed at, among other things, environmental sustainability.

However, if a Social Enterprise is set up as a not-for-profit company, society or trust with identified social/charitable objects, then such enterprise cannot deviate from such objects without seeking the consent of relevant stakeholders in accordance with applicable laws. 

No.

There are no specific requirements for major investors to look at ESG issues. That said, it is advisable for investors to set up mechanisms to ensure that portfolio entities are in compliance with applicable CSR requirements (discussed above in Part I.(9)).

a. N/A

b. There is no restriction on investors considering ESG issues while making investments in India.

c. Other relevant factors that are considered by investors include adherence to anti-bribery and anti-corruption laws, and whether the investee undertakes any business which may be undertaken in a restricted/regulated sector. Further, we have noted that investment funds (including sovereign wealth funds and pension funds) typically require the implementation of certain other policies (such as Anti-Money Laundering and Combating Financing of Terrorism policy, environment, health, safety and social policy etc.) by their portfolio companies.

Social Enterprises operating as For-profit companies can receive funding through foreign contributions (subject to receiving regulatory permission for the same), equity investments by foreign charitable organizations. They cannot receive CSR grants, but may undertake charitable purposes as For-profit organizations. For-profit Social Enterprises may also receive concessional loan interest rates that are not available to typical For-profit ventures.

Social Enterprises that operate as Nonprofits may receive domestic grants in the form of CSR funding, and foreign grants in the form of foreign contributions.  While the majority of Nonprofit Social Enterprises’ funding comes in the form of foundation grants, in-kind aid and donations, funding for For-profit Social Enterprises comes in as equity, equity-like investments, loans, and grants from foundations.

There has been a rise in the incorporation of social venture funds (impact funds) in the last few years in India. Such funds are mandated under law to invest at least 75% of their assets in businesses having a positive impact in society. Additionally, incubators, accelerators and impact investors also provide funding for Social Enterprises in India in the form of grants or investments. Multilateral donor agencies such as DFID (UK), USAID, Ashoka, etc., also play a role in providing seed funding and acceleration services to Social Enterprises.

Funds from microfinance and business school consortia (organized by prominent management institutions, such as the Indian Institute of Management, Calcutta) are also beginning to gain ground, as younger Social Enterprises become more interested in repayable sources of finance. However, there is not a lot of information publicly available about the type of legal entities incorporated to form these consortia.

There has been an increase in for-profit impact investments in India. Further, there are specific funds operating in India which invest at multiple stages and concentrate on for-profit impact investments in India.

Government funding is typically in the form of grants, concessional loans, direct benefit transfers and government contracts.

a. While it is not typically difficult to qualify for government funding if an organization meets the criteria to receive such funding, there may be other bottlenecks, such as the amount of funds received may be relatively low, bureaucratic holdups, or benefits may not get disbursed on time. Social Enterprises typically have to rely on incubators, accelerators, microcredit institutions, impact funds, and foundation grants.

b. The government provides dedicated funding for Social Enterprises through different initiatives. Examples vary by sector – the Pradhan Mantri Fasal Bima Yojana (Crop Insurance Scheme) and Prime Minister Krishi Sinchayee Yojana (Crop Irrigation Scheme) in agriculture; the National Energy Policy 2017 for clean energy; the New Education Policy (NEP) in education, Solid Waste Management Rules (SWM) 2016 for water and sanitation; the Digital India, Startup India, and Stand-up India schemes, and the concessions provided to Micro, Small and Medium Enterprises.

• The Micro, Small and Medium Enterprises policy of the government provides for concessional rates of interest for loans to registered enterprises. The government also plans to introduce special mechanisms for dispute resolution for such enterprises. The Startup India policy also accommodates start-ups. However, the government does not make specific mention of Social Enterprises in the above policies nor does it earmark any funds thereto.
• The regulatory burden has also been lightened in some sectors. In intellectual property rights, for instance, the number of forms to register a trademark has been reduced and there is a government subsidy to enterprises filing for trademarks.
• Additionally, India’s Foreign Direct Investment (FDI) policies are becoming increasingly friendly to Startups, and may allow for the influx of foreign investment, subject to sectoral caps, into some types of Social Enterprises.

Social Enterprises that are in the nature of Nonprofit organizations are not listed on securities exchanges in India. However, the Central government has proposed the establishment of a social stock exchange, which would assist Nonprofit organizations in gaining visibility with investors and donors and raising funds. Some initial progress has been made in this regard and technical groups have been set up by the SEBI to develop a framework for the induction of Nonprofit organizations. 

Companies with profits over specified thresholds are required, in terms of the Companies Act, to pursue certain CSR activities. 2% of such companies’ profits are to be used for such actions, and companies must report such utilization annually. In addition, Regulation 34(2)(f) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires the top 1000 (one thousand) listed companies (based on market capitalization as of March 31 of every financial year) to submit an annual business report describing the initiatives taken by such companies from an environmental and social perspective. Other listed companies are also permitted to submit such a report on a voluntary basis.

The utilization of impact bonds in India is still at a nascent stage, and such instruments have been utilized to a limited extent in certain sectors such as education and healthcare.

Yes, Social Enterprises must comply with all applicable restrictions and regulatory compliances for receipt of foreign investments or donations.  

• Foreign Investment: All For-profit Social Enterprises and traditional Enterprises are subject to the Central government’s restrictions contained in the FDI policy (revised periodically), where applicable. Except for a Venture Capital Fund established as a trust, all Nonprofit entities are barred from receiving FDI.

Restrictions vary by sector (permitted and prohibited) and the type of approval required (automatic or government) for FDI. For instance, FDI is prohibited in the manufacture of tobacco or tobacco substitutes, and FDI in the Defence sector is automatically approved up until 74% FDI, and requires government beyond 74% FDI. Sectors that are not covered (either prohibited or permitted) by India’s FDI policy do not have foreign investment caps.

• Foreign Grants: Both For-profit and Nonprofit Social Enterprises must seek permission to receive foreign donations/grants, and may only use 20% of these funds towards administrative costs, having the ability to use such funding only for the limited purposes identified. Such recipients are not allowed to further transfer these funds to any other organization (including partner organizations).

Crowdfunding is legal in India, allowing Nonprofits and Startups to solicit investment/donations from the public in all forms except equity-based crowdfunding, for any legal purposes and from social venture funds (alternative investment vehicle investing primarily in social ventures). Crowdfunding platforms like Milaap, Ketto, and Wishberry offer services in India.

However, crowdfunding does not yet have a clear regulatory framework, and SEBI is considering introducing norms that may create restrictions on who can solicit and donate via crowdfunding.

There are tax exemptions available for Nonprofits generally, but there are no tax exemptions uniquely available for For-profit Social Enterprises.

a.  Nonprofits (whether or not Social Enterprises) need approval/ registration with the Indian tax authorities to obtain tax benefits. They enjoy two key tax benefits on meeting specified conditions. First, their income is tax exempt. Second, donors may claim a deduction of a specified percentage of their donations made to such nonprofits on their reported income.

• Startups also receive some tax benefits, the key being exemptions for eligible Startup PLCs/LLPs (those incorporated between 1 April 2016 and 1 April 2021) from income taxes for 3 consecutive financial years out of the first 10 years after incorporation, and also exemptions from income tax on angel investments made by government accredited investors. For-profit Social Enterprises satisfying these criteria are also entitled to these benefits. The Central government has also recently announced that they will be extending the time period of eligibility by one more year to also enable Startups incorporated between 1 April 2021 and 1 April 2022 to avail these tax benefits.

b. Tax benefits vary with the type of body to be taxed, whether Nonprofit organizations, Startups or traditional Enterprises.

• There are certain benefits solely available (mentioned hereinabove) to Nonprofits engaged in charitable activities, such as relief of the poor, education, yoga, medical relief, preservation of the environment, monuments, or objects of artistic or historic interest and the advancement of any other object of general public utility. Additionally, Nonprofits such as Universities, educational institutions and hospitals, enterprises engaged in scientific research, research in social sciences and statistical research are also eligible for such tax benefits.
• Tax deductions are also available for payments made to government-approved funds, projects, rural development programs, programs for the conservation of natural resources, skill development projects, etc.

c. To avail tax exemptions, Nonprofits need to apply their incomes towards charitable/ research purposes in India. There are also restrictions on the accumulation and investment of surplus funds. Tax-exempt Nonprofits can only invest in specified modes of investment and may be required to comply with restrictions on carrying on commercial activities. Finally, Nonprofits are not permitted to apply or divert their funds for the benefit of any interested party (such as trustee, shareholder, settlor, etc.).

• For-profit Enterprises may claim certain tax benefits when engaged in or contributing to certain objects that may potentially be considered social enterprise. For instance, tax deductions are available for capital expenditure incurred by specified businesses, which include, building and operating hospitals, developing housing projects for slum development, or rehabilitation, etc.

No.

No.

No.

No.

There are government grants, concessional loans, and government contracts available for small businesses as mentioned above in Part II.(2). However, there is a gap in the disbursement of these funds, and typically small businesses and Social Enterprises look to investments, donations, go-to market strategies to build their credit and finance. The government also has various skilling programs in place to skill rural populations.

The COVID-19 pandemic has also prompted the Central government to partner with the World Bank, foreign governments (e.g., the US) and private players (including social media platforms and impact investment firms) to offer financial resources, scaling support and mentorship to non-government organizations and Startups offering innovative solutions to tackle the adverse (direct and indirect) impact of the COVID-19 pandemic, and to small businesses.

Typically, For-profit Social Enterprises do not have different compliance requirements from traditional Enterprises, since they are all governed by the same Central legislation, i.e. the Companies Act, and must report to the same regulator, that is the Registrar of Companies.

Nonprofit Social Enterprises have their own compliance requirements depending on the type of legal entity that is constituted. For instance, a public charitable trust in India must function in accordance with the trust deed establishing the public charitable trust with reporting requirements governed by state-specific legislation. Or for instance, registered societies must function in accordance with the rules and regulations of the society set up in the Memorandum of Association and report to the Registrar of Societies for the state in which they are established.

There is no dedicated government agency or department overseeing Social Enterprises in India.

Since multiple types of Social Enterprises exist in India, each type has a diverse set of regulatory bodies. For instance, while Startups and traditional Enterprises have the same regulators and oversight bodies, such as the SEBI and the Registrar of Companies, and are also under the mandate of the Indian Ministry of Corporate Affairs; Startups also fall under the aegis of the Indian Ministry of Commerce and Industry in the Startup Policy, providing for tax benefits (as detailed in Part III), simplification of legal compliances with environmental and labor laws, fast-tracking patent and bankruptcy procedures et al.

The Indian Ministry for Micro, Small and Medium Enterprises oversees those Enterprises acting as ancillary units to larger industries and those operating in rural India. The said ministry supplements the role of state governments in encouraging Micro, Small and Medium Enterprises by providing support in product marketing; credit rating; technology acquisition; modern management practices adoption etc.

Similarly, Nonprofit Social Enterprises have their own unique regulators and oversight bodies, depending on the states in which they choose to incorporate, or the type of organizational forms they take, and also have unique tax benefits (as detailed in Part III).

No, however, small companies (determined by share capital or total assets) and Startups can take advantage of a fast-tracked insolvency process – this includes smaller-scale and younger For-profit Social Enterprises.

Depending on the current processing times and the type of organization being created, it can take between 1 to 3 months for an Enterprise to be registered. The conventional PLC form usually takes up to 1 month to incorporate once the application for incorporation is filed.

No specific certifications except obtaining a prior registration/ approval with Indian tax authorities are required for seeking tax benefits/ exemptions. 

While Startups can be formed easily in India, they have difficulty flourishing because of certain financial and operational constraints. Key among challenges for Social Enterprises in India are access to finance by way of capital, grant funding, and cash flows, and a shortfall in the availability of managerial and technical skills.

Further, news reports indicate that extended grievance redressal times and mechanisms can damage the market and regulatory predictability, which Enterprises generally need to succeed or attract foreign investment.

Social Enterprises can form relatively easily if they want to organize as a For-profit Enterprise, but are not eligible to receive CSR funding and find it challenging to access institutional credit and make use of government funding.

Social Enterprises must go through a relatively longer process if they want to form as a Nonprofit and take advantage of the tax benefits and access their primary sources of funding i.e. CSR funds and foreign donations/contributions. The additional requirement of having a track record in place to receive CSR funding makes it hard to access a primary funding source in the first three years for any Nonprofit. However, the inability to provide a return on investment to investors for Nonprofit Social Enterprises, in turn, prevents them from scaling up since they cannot access big financing sources of capital investment.

Whether Social Enterprises operate as a For-profit or Nonprofit, the funding sources of both are limited in their own ways, as explained in this response, and are the largest barrier to their success.

Additionally, studies on India’s social enterprise landscape suggest that difficulty in accessing mentorship from experts on scaling up and having to keep prices low owing to lack of market purchasing power by target demographics also plays a role in inhibiting the success and scalability of For-profit Social Enterprises or Startups that are Social Enterprises.

There are no specific barriers to the formation of Social Enterprises in India. However, inherent restrictions on funding such organizations may act as deterrents. For e.g., for both For-profit and Nonprofit Social Enterprises, the restrictions placed on the receipt of foreign contributions (detailed in Part II.(8)) tends to limit the ability to attract foreign funding unless in the form of capital investment (which is also only available to For-profit Social Enterprises). Further, the prohibition on the receipt of CSR funding for For-profit Social Enterprises limits their funding sources.

Further, while there are no legal obstructions to otherwise discourage the formation of social Enterprises, there are some enabling provisions for Startups in this respect. For instance, Startups can get government recognition to participate in India’s public procurement processes. This recognition exempts them from needing to meet certain selection criteria, such as having prior experience and prior turnover. However, the extent to which Social Enterprises avail these exemptions is unclear, since the Startup India Policy does not identify Social Enterprises as a distinct category of Startups.

No, there are various regulatory safeguards in existence in the Indian legal system to address concerns of fraud and corruption, such as anti-corruption laws, anti-money laundering frameworks, online financial fraud norms, and know-your-customer frameworks for financial services. However, enforcement and implementation of these regulatory frameworks may not be stringent in all cases.

• Introducing amendments to corporate and other applicable laws to permit Social Enterprises to raise capital and obtain loans from domestic and foreign lenders.
• Making ESG reporting mandatory for all companies in India. This would bring in transparency and enable such companies to attract investments from ESG focused funds.

The extant companies’ law in India may be amended to increase coverage of companies which are required to contribute towards statutory CSR requirements, and the implementation of such requirements should be ensured on a stringent basis.

No.