As this commentary illustrates, investors in India are seeing rapid change, where outside capital is bringing fresh governance scrutiny and the premium that brings. "Investors will judge you based on how clean your reputation is in the market. And this is reflected in the value of your company, so it is very important, but it is easier said than done.”

Sanne recently played host to a technical roundtable exploring India's alternatives sector, including navigating regulations, government incentives and the challenges that external disruptions bring. In the following guest piece, country head for Sanne in Mauritius, Peter Nagle, picks up the theme from the investor's perspective. He talks with VCs about their evolving relationship with Indian family businesses and young independent entrepreneurs all keen to scale, where governance is looming in attracting capital. India's economy slowed last year at the same time that slow global growth sent investors looking for returns in emerging markets. Nagle suggests that the country remains a magnet for foreign direct investment and has taken strides to become more attractive as an investment centre. In addition, he said, Bengaluru has become India’s technology hub and consequently attracted good venture capital inflows, and Singapore is gearing up to facilitate deals. His shares his thoughts and the views of venture groups with a stake in the region. The editors are pleased to share these comments and invite responses. To reply, email tom.burroughes@wealthbreifing.com and jackie.bennion@clearviewpublishing.com

A global push for impact investing
The swell of opinions around impact investing is on the rise. Globally, voices are growing louder across the spectrum - from sources within US politics on redistribution of wealth through to climate change. Considering how businesses should work with underserved communities is now beginning to seep into the consciousness of fund investors, the ultimate sources of capital that back these businesses and also corporates and CEOs. Everyone is waking up to this.

The term impact investing has only recently become mainstream. In India, the example of non-profit microfinance organisations transitioning into commercial entities indicates the potential here. India has one of the largest consumer bases globally and has barely scratched the surface as far as low-income communities are concerned.

As there is so much opportunity in main cities with middle income and higher income earners, few have bothered going deeper to build businesses that work with lower income consumers as equal business partners.

“It's almost like discovering a new trade route or a new market that you can do business in. We soon realised that there are millions of customers in the low-income segment who are very eager to pay on a commercial basis for high quality services and products. They're demanding like any other customer. My first question when I transitioned out of banking was, is there a conflict between impact and commercial returns? And honestly, there is that very mystical interim zone where the two come together beautifully,” said Jyotsna Krishnan, managing director of Elevar Equity.

When you bring the customer’s interests to the centre of everything you do and design everything by keeping the consumer base in mind, there is no conflict between impact and commercial returns. Similar to the way Apple designs its products.

It is a huge opportunity and investors have not fully understood the potential of this market. Ultimately it involves taking smaller ticket size products and services, building deeper distributions and scaling, because we're not talking about thousands of customers. Companies in this space have gone on to serve more than 25 million customers globally.

The key difference between impact investing and commercial investing is the different consumer base. It is also a different space in terms of how to approach these business models and the DNA of these organisations. It’s about combining the best of commercial talent, which is repurposed to think about this customer segment, and seeing how to build long-term sustainable businesses at scale.

“We've seen the entire journey of microfinance go from non-profit operations to getting small finance banking licence and witnessing really successful IPOs in the market. When we meet the teams and the talent out there, we are amazed. We look for a couple of decades of experience, because that experience is useful in working in emerging markets like India. Ultimately, we're multiple states within one country and you need to know a lot of things,” added Jyotsna Krishnan.

Currently, there is a lack of social and impact capital to help these businesses scale up. Investors have to look at companies and entrepreneurs who are capable of attracting commercial capital because these businesses will require capital to scale. It is about establishing credibility to prove that they can deliver well-rounded businesses. This means establishing a focus on governance and quality standards very early on in the journey.

This is important because when building rapidly at scale and working with underserved communities, there are multiple stakeholders to take into consideration. Commercial interests can compromise customer interests and that’s when things fall apart.

Starting with the right DNA that is focused on the customer segment and aligning teams, processes, systems and governance structures around it, ensures that there is no compromise of the core principles and value systems.

“That’s a really core part of the DNA because when you start scaling and attracting more capital, you need to have the credibility to ensure that you stay the course. It's great to see some of our entrepreneurs who may or may not have substantial ownership in companies, but are able to call the shots and lead discussions across a board full of multiple private equity investors and senior professionals. They've established the credibility, they know the client segment and are doing the right thing.

“We have seen instances where a commercial investor took the most customer centric-decision, whereas an impact investor did not. It is more about finding aligned partners rather than how to classify them. Ultimately, it comes down to people who understand good business, who understand the right thing to do and are aligned with the long-term visions of the companies concerned,” said Jyotsna Krishnan.

Ajay Mittal, founding member and partner at Ascent Capital, commented that when they began investing 10 years ago, they never considered the impact that companies are creating. “Back then, the fact that we were backing entrepreneurship, which is creating jobs, was the impact created. The amount of impact those companies are creating in the supply chain is phenomenal. One company over the last two years has come close to US $3 billion of financing - it really is amazing. We've started to reflect on this and realised you can create impact even when you are not focusing on it. When you do focus on impact, it can be far more valuable. Now we started counting and evaluating impact. We had no-one going anywhere near this originally, but LPs are definitely looking at this segment now.”

Governance
Investors are increasingly concerned about governance and compliance in companies, especially large companies. In early stage investing governance can be difficult to ascertain and it is said that investors prefer to influence governance through majority control. However, how investors influence governance depends on how they view it.

T C Meenakshisundaram, managing director at venture firm Chiratae, stated that his business has a policy of taking a seat on the boards of the firms they invest in, and often add additional committees in areas like compensation. There is a significant premium, even in the private market, for good governance. If a company eventually wants to bring an IPO, good governance must be in the DNA of the organisation, or it will be very difficult to implement. It is an important aspect, but the promoters don’t always see eye to eye on the definition of governance.

“There are the standard procedures that should be evaluated such as how the financial accounts have been stated, are there any leakages, are there cash transactions, what kind of auditors does the firm have and what kind of people are in the finance department? All this is done thoroughly but the real action takes place when we have invested, and that's why I say that the definition of governance by the promoter and the investor needs to be aligned,” Meenakshisundaram said.

It is often easier if the venture entity is a tech firm where the founder is young. They usually look at the big picture to scale the company, sell it in five years and then move on. Conversely, when founders and their promoters who run a company as a family business are involved, it is more complicated. It can result in arguments at every board meeting and harm the relationship. The other alternative is to go through the issues, be patient and implement whatever incremental change you can to achieve your objective in a year and a half.

“While a VC firm may have a 100-day programme in mind post investment, in reality it is about changing mindsets and that can take longer, even if promoters see the benefits. It is also important that independent directors play their roles effectively. Founders do appreciate the governance aspect and this is vital, especially if you are looking to an IPO and you have to present your story to an incoming investor. Investors will judge you based on how clean your reputation is in the market. And this is reflected in the value of your company, so it is very important, but it is easier said than done,” Chiratae's managing director added.

Singapore-based variable capital company structures
There is certainly appetite for structures with different compartments and ring-fenced liabilities. Singapore is likely to see the first batch of variable capital companies coming in the first or second quarter of 2020. Hong Kong has already come out with an open-ended company regime, which is similar to Singapore’s VCC. Mauritius brought in protected cell company structures some time ago.

“There are already structures out there that investors could have used in Cayman. The industry will have to see how much new demand there will be for VCCs in Singapore. Nonetheless, the Singapore VCC allows one to distribute profits and dividends from the capital of the company. This is something that was always seen as a challenge given the solvency test requirements, which otherwise applies to funds and holding companies. So this definitely caters to a different class of investors and funds,” Meenakshisundaram said.