By Aparna Dua and Sanchi Khurana (Asha Impact), with legal inputs from Amrut Joshi and Atulaa Krishnamurthy (GameChanger Law Advisors)

Social enterprises have a dual mission to achieve impact and financial returns and often find it hard to raise patient capital for growth as they don’t offer the hockey stick projections that investors are looking for. Confronted with this challenge, they may be forced to drift away or abandon their social mission all together, to chase after more lucrative customer segments or product pricing. Impact-linked debt instruments such as Social Success Notes provide an elegant solution.

“In situations like the current pandemic, when funding dries up for social enterprises, such innovative blended finance structures become ever more relevant and important.”

1. What are Social Success Notes?

Social Success Note is a loan provided to a social enterprise with a proven impact and business model that can service debt. The financing helps the enterprise to scale up and hence achieve growth and amplify its impact. The loan is offered at a discounted rate linked to the achievement of social outcomes.

2. How do they work?

• An Outcome Funder (philanthropic organisation/ government), Risk Investor (Impact Investor/lender) and Social Enterprise enter into a contract wherein the enterprise receives working capital finance in the form of a loan from a risk investor to scale its operations. The outcome funder promises to incentivise the risk investor and the social enterprise on achievement of stipulated social outcomes.
• The investor offers a loan (may be concessionary) to a social enterprise
• The enterprise works closely with the target beneficiary group to provide affordable access to goods or services which were hitherto unavailable to this group
• An independent evaluator verifies the impact created on the ground
• Payment flows originate from the Outcome Funder and the Social Enterprise:
• Outcome Funders → Risk Investor and Social Enterprise (Incentive payment if predetermined social outcomes are met)
• Social Enterprise → Risk Investor (Principal and its share of the interest payment on the loan)

“This helps the Risk Investor achieve an agreeable risk-adjusted return and helps lessen the interest burden on the social enterprise.”

3. What are the incentives for different stakeholders to come together

• For social enterprises: Provides access to working capital at a discounted interest rate, linked to the achievement of outcomes
• For Risk Investors: The investment opportunity is made more attractive by the incentive payments offered by the outcome funder. In the case of an impact investor, provides an opportunity to support projects with high impact and agreeable risk-adjusted returns
• For Outcome Funders: Effective utilisation of philanthropic funds
• For Beneficiaries: Access to affordable goods and services and a focus on outcomes and quality rather than inputs/ activities.

4. Given the multiple parties involved, what are the different contractual agreements to consider?

a. In case all parties are residents of India

• Loan agreement: Between the social enterprise and the Risk Investor; the agreement includes size of loan, interest rate, repayment schedule, event of default, force majeure clauses etc (see this report on what happens in pay-for-success instruments in the event of a pandemic).
• Tripartite agreement: Between the three parties; determines who the beneficiaries are, what the outcomes are and when they’ll be measured, price per outcome and whether the outcome payment is fixed or payable on a sliding scale, termination triggers, consequences of failure to meet outcomes etc.
• M&E agreement: Between the Outcome Funder and the independent evaluator; this document highlights at what stage the independent evaluator would get involved and the periodicity of evaluation (ongoing or at the end of a time period), the baseline and the target outcomes

b. In case the Risk Investor and/or Outcome Funder are offshore (non-residents), a few additional documents are required

• Loan agreement subject to the RBI’s External Commercial Borrowing guidelines: Loan Agreement is executed between the social enterprise and the Risk Investor. Prior approval is required from the authorised dealer bank (includes most commercial banks) which manages the filing process (Form ECB that must be filled as part of the compliance process).
• Additional Reporting requirements under the ECB Guidelines: The fundraising entity to

1. Procure a loan registration number from the authorised dealer

2. Report any change in repayment terms

3. File monthly returns

• Tripartite agreement and M&E Agreement serves the same purpose as described above in 4(a)

5. What are some of the key terms that need to be negotiated between parties?

• For social enterprises: Loan repayment schedule, outcomes and timeframe for achieving them, events of default and consequences, reporting obligations
• For Risk Investors: Payment schedule for social enterprise (Principal) and outcome funder (incentive payment)
• For Outcome Funders: Outcomes, payment triggers and associated timelines
• For Monitoring and Evaluation partner: Frequency and mode of evaluation and reporting, payment mechanics and consequences of termination of any document such as tripartite agreement, loan agreement etc.
• In the wake of COVID-19, the force majeure clause is an important one to factor in to all agreements, to ensure adequate risk sharing by all parties in such an event
• Dispute resolution clauses must be standard across documents to avoid parallel proceedings

6. What are the time and costs associated with contracting?

Time and costs would be closely associated with the financial, legal and business diligence as well as the contracting process involved.

• Business Diligence involves a through review of the business model to gauge the financial sustainability of the model and its ability to service debt
• Legal Diligence involves understanding the corporate governance framework, the company’s compliance with and liabilities under existing laws and contracts, shareholder agreements, other outstanding loan agreements etc.
• Cost associated with diligence depends upon the depth and duration of the process. With more SSNs in the market we expect that the timelines and costs will reduce as regulations may become more streamlined and documentation would be more templatised.

7. Where can I find more information on Social Success Notes?

• Asha Impact and Aspen Network of Development Entrepreneurs (ANDE), with the support of SAP and UNDP SDG Finance Facility, are releasing a playbook on Social Success Notes that will serve as a guide for entrepreneurs, investors and outcome funders interested in exploring this funding structure. It includes inputs from UBS, YSB and MSDF based on two pilots conducted by these organisations in Uganda and India.
• View the recording of the recent webinar on the same topic, organised as part of the ANDE India SGB Finance Learning Lab, as well as the slides presented and a compilation of the questions & answers for further reference.