All about Legal Framework of Social Impact Companies By: Bhumesh Verma

The concept of social impact companies has been in prevalence in certain western countries. However, the prospect of social impact companies is in primitive stage in India.

 ‘Social impact companies’ means the companies which will work with their prime agenda being uplifting the living standards of the people and to make a positive change in the society by transforming lives of people.

The central government is mulling inception of a new law to exclusively deal with the incorporation and regulation of the social impact companies with the end objective to generate investments for scaling up the development programs in the country and to ensure that progress of any development scheme will not be hindered on the ground of lack of funds.

The underlying intent is to encourage investors to infuse investments in social impact companies with the provision of profit sharing amid the shareholders.

Infusion of private capital (via social impact companies) into development programs will assist the central government in accomplishing the prospect of sustainable development at the national level.

The task of formulation of new law in relation to social impact companies is assigned to the Ministry of Corporate Affairs (MCA). It may take some time to develop a robust framework in this regard as the concept is evolving.

As of now, companies which work on non-profit basis are expressly prohibited from sharing the dividends with the shareholders – the very idea of this new prospective law is to facilitate the social impact companies to distribute the dividends with the shareholders within statutory established limits.

Unlike Not-for-profit companies which come under the ambit of Section 8 of the Companies Act – The social impact companies will have more flexibility in running their business operations and will have the authority to share the financial fruits of their efforts with the shareholders.

The social impact companies may be considered as upgraded version of Not-for-profit companies covered under the Section 8 of Companies Act, 2013.

The prospect to pioneer the social impact companies is an interesting and intriguing concept – Evolution of social impact companies is a welcome measure and has the potential to serve, inter alia, two objects:

a) Generating funds for accomplishing the economic and development goals of the central government in a sustainable manner; and

b) Encouraging investors to contribute to economic development through exploring the business aspects associated with social development.

The Author, Bhumesh Verma,, is a Corporate Lawyer with over 2 decades of experience in advising domestic and international clients, with a place in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters.