India Inc India Inc: Thursday, 20 December 2012 09:07

The Balance Sheet with Pratik Dattani - Social Enterprise – can it mean different things in India and Britain?

Social Enterprise – can it mean different things in India and Britain?

According to the Indian ministry of corporate affairs, there are 2,487 registered social enterprises in the country (2011). That is one for every 500,000 people in India.

According to the UK's Department for Business, Innovation and Skills (BIS), there are 68,000 social enterprises in Britain (2008). That is one for every 890 people in Britain.

According to Social Enterprise UK, a social enterprise is a business that trades specifically to "make a difference" and has a social and/or environmental purpose, earns money through income (rather than grants or donations), and reinvests the majority of its profits.

It is clear India has far greater social issues that these companies could address than Britain – 53 per cent of India's employment is in agriculture, compared to only 19 per cent of its GDP; 41 per cent of the population lives below the poverty line of $1.25 per day. Adult literacy rate is 63 per cent. In fact mortality is 50 in 1,000 births. So, why the difference?

At least part of this is to do with methodolical differences – in Britain, there are a number of legal and group hybrid structures. Managing director of the Social Enterprise Mark (SEM), Lucy Findlay, believes many organisations may claim to be social enterprises, but may simply not understand what that really means. But because the term is the new "in" thing, they err on the side of claiming it, rather than not. In reality, some organisations may not understand what the SEM means by social enterprise, given that qualifying for its very specific definition often depends more on a clever accountant, than a social purpose.

In India, while there aren't the myriad of structures, what is present is sufficiently complex. An Indian accountant would call social enterprises "Section 25" companies, per the Companies Act 1956. These are companies which are incorporated for promoting art, commerce, science, religion or any other charitable object. They need a minimum authorised share capital of Rs 100,000 and all profit must be reinvested for the promotion of its objects (SEM requires more than 50 per cent). The regulatory structure is lighter touch than for for-profit companies but offers better transparency than a trust or society structure. It may receive donations from its members (SEM says these need to be less than 50 per cent).

However, the government has the right to revoke the Section 25 license and force the enterprise to become an ordinary company. An ordinary private or public limited company can apply for a license to be a Section 25 company, but not the other way around. It cannot distribute profits as dividends to members, whereas certain types of social enterprises in Britain can. Closing a Section 25 company can often take up to two years.

These legal complications rather obfuscate the real purpose behind social enterprises. As I've argued in the past, or as the Asian Development Bank (ADB) outlines in its report on India's Social Enterprise Landscape earlier this year, social enterprises should more simply be defined as: organisations with a triple bottom line, in that they address social and environmental needs and have a sustainable revenue model (or plan to have one in the near future). The ADB emphasises that a focus on legal structure complicates, and limits, the sector.

In a Financial Times article on social entrepreneurship in India earlier this year, the definition was closer to that of the ADB: doing something socially relevant, not simply a charity, and for-profit. Smart young Indians from business schools who want to tackle India's monumental development problems, but make money too, are finding this kind of definition particularly appealing.

Google Trends shows that the term "social enterprise" has entered the psyche in recent years in particularly the southern states in India, namely Karnataka and Andhra Pradesh, with a similar trend followed by "social impact" and "Section 25 companies", although there is far richer data on the increasing awareness of social impact in North India, particularly in Uttar Pradesh, Madhya Pradesh and Rajasthan.

The sector press in Britain argues about what it all means on a regular basis, in a battle between purists like Lucy Findlay and entrepreneurs not wanting to be encumbered by definitions. In India, from the 50-year-old FabIndia, to Shahrukh Khan's engineering feats in the film Swades, to modern day jugaad innovators like Husk Power Systems, marrying entrepreneurship with social purpose has been part of life. The current draft of the Companies Bill 2011, scheduled for introduction in the current Winter Session of Parliament, will clear many of the cobwebs in the Companies Act 1956. Amongst this may be new norms around company spend on Corporate Social Responsibility (CSR). This may well bring social enterprises and worthwhile causes even further into the national psyche.

Pratik Dattani is managing director of EPG Economic and Strategy Consulting and also runs a large not-for-profit organisation with strong links to India. He is an economist whose work focuses on helping organisations and investors understand social returns and impact investments.

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