Framing a social enterprise law
BRAC and Grameen - Bangladesh is home to two of the world's largest social enterprises. Undisputed as this fact is, it is curious that our country is yet to provide a distinct legal framework to define, organise or set out the scope of social enterprises which meets the dual goals of purpose and profit (the fundamental non-profit goal of positive impact and overarching for-profit goal of maximising profits).
The launch of the Digital Bangladesh initiative of ICT4D (ICT for Development) has seen not only exponential rise in tech-based startups, but also many initiatives defining themselves as “social enterprises”, with the number of competitions looking to fund social enterprises particularly combining both economic and social objectives also on the rise. Sector participants at present work on an ad-hoc definition of social enterprise. However, it is clear that there are variants of this definition which differ from expressing a social enterprise as: two entities - one profit and one non-profit, to a company which expends its revenue or profits in social good and any number of models in between.
It is admirable that Government is taking a progressive view to social enterprise growth. However, it is the time to bring social enterprises within a legal framework or, at the very least, to define what a 'social enterprise' is, in order to resolve the structural and financial uncertainty of such ventures.
There are entities who pitches for investment on a for-profit investment platform while also define themselves as 'social enterprises' in other competitions to qualify for non-profit grants. One cannot blame the founders for being confused about or trying to take advantage of, this lacuna of legal definition. The need for law on social enterprises or at least a definition has become more pertinent because of the promulgation of the Bangladesh Securities and Exchange Commission (Alternative Investment) Rules, 2015.
The Rule allows the highest percentage of return to funds investing in “Impact Investment”. Rule 2(10) of the said Rules defines “Impact Investment” as “an alternative investment fund which invests in equity and equity linked instruments of such companies, organisations, and funds which are engaged in activities with the intention to generate a measurable and beneficial social or environmental impact in addition to financial returns, as justified with internationally recognised criteria”. The markers for impact investment in Bangladesh therefore is investing in organisations which satisfies 'social' or 'environmental' performance norms while yielding also financial returns.
The definition however also talks about investment in 'equity' while opening up investment not just to companies but also “organisations” which deliver social and environmental impact. Does this therefore allude to a 'social enterprise' being a for-profit company or firm advancing a specific social or environmental goal?
Any fund or investor will agree that for every investment, structure of the investee entity is a key consideration and ties in with the end goal of exit. For investing in a non-profit or a for-profit organisation one must look into some internal matters. Such as in non-profit the payments are in the form of 'donations' or 'grants' unless it is a 'loan', however impact investment is not a donation, a grant or a loan.
In case of a for-profit, what percentage of the company/firm's operations should be for social good in order to qualify for investment? Taking the SDGs as an example, would a garments manufacturing unit running a school educating workers' children qualify or should reliance be on specific systems of quantification such as Acumen Fund's BACO (Best Alternative Charitable Option) or GIIN's IRIS (Impact Reporting & Investment Standards) or Global Impact Investing Rating System (GIIRS)? This is obviously a simplistic example setting out an over-wide range, the author's point being only to have the reader reflect on what the parameters and qualifying criteria should be.
In the absence of specific legal guidelines, there has to be a social enterprise model consisting of a parent non-profit entity and for-profit subsidiaries. However, from a growth perspective and looking at how social enterprise law can evolve, guidance can be taken, inter alia, from US or UK where there is special law or an additional layer of registration/certification under law to incorporate.
Given the intersection of evolving laws, Governmental guidance is required to provide clarity in terms of law, definition, qualification and taxation relating to social enterprise, a clear guideline on what can and cannot be done and also to bring this burgeoning sector within a regulatory framework. This has to be done keeping in mind the need for lower registration costs and optimal tax structure given the less-profit, more social good objective.
The writer is an Advocate of the Supreme Court of Bangladesh and Managing Partner at the law firm, The Legal Circle.