New Delhi, April 22 -- An offshore limited partner's exposure to Bengaluru-based venture capital firm India Quotient is under the scanner after an independent watchdog raised concerns about reputational risk and weak links to environmental, social, and governance (ESG) parameters.
The Independent Commission for Aid Impact (ICAI), an independent non-departmental watchdog for the scrutiny of official development assistance by British government agencies, has raised serious concerns over the suitability of some investments by British International Investment (BII), particularly its investment in India Quotient.
The ICAI noted in a report that BII, the UK's development finance institution, committed $8 million to India Quotient's fourth fund, which raised $115 million.
The watchdog found that India Quotient has invested in a cosmetics brand, Sugar Cosmetics, social media platforms, including Sharechat, and some dating sites. It claimed that on Sharechat, it found content featuring glorification of Hamas's attacks on Israel, abuse of women and offers of sexual services. These investments create reputational risk for BII by association, the ICAI said.
"The investment in the fund was made two months after BII's chief, in April 2023, had reassured Parliament's International Development Committee that, following concerns about an investment in a cosmetic surgery clinic, future investments in India would only be made if there was a 'compelling argument' on inclusion and sustainability," said ICAI in its review.
"Given how difficult it is to moderate large social media platforms to remove harmful content, we have to question why BII chose to invest in the India Quotient Fund and did not consider the reputational risk," said ICAI Chief Commissioner Dr Tamsyn Barton, who led the review.
"How is this an appropriate investment for UK aid, which must have poverty reduction as its goal? It is just not clear why the use of capital from UK taxpayers is justified for investments in social media sites," Barton added.
To be sure, India Quotient is also an investor in Lendingkart, Loantap, Giva, FabAlley, Flynote, Frnd, KukuFM, and Koo, among others.
An email sent to India Quotient didn't elicit a response till the time of publishing this story.
The ICAI also said its review found that BII's India portfolio adopted too broad a definition of 'inclusion' and did not effectively target low-income or marginalised groups. It did not convincingly link its investments to the reduction of poverty and some of its earlier investments did not have well-integrated climate or environmental objectives.
The watchdog also pointed out another LP-style bet by BII in India. It noted that BII invested $14.4 million in 2021 in the fourth fund of VC firm Blume Ventures, which raised $240 million. BII justified the investment citing impact through "access to healthcare and education and clean-tech solutions".
The ICAI said that while BII's portfolio of investments through Blume Ventures did include positive "clean-tech solutions", it has no underlying investments relating to access to healthcare and includes low-development impact investments in video entertainment sites.
In response to the ICAI's concerns, BII pointed out that the investments highlighted by the watchdog tackle digital exclusion and economic barriers to gender equality.
"ShareChat offers services in 14 regional languages, helping the digital inclusion of millions of non-English speaking Indians. In common with all social media networks, it has a tiny fraction of its users who may post offensive content. It employs 150 content moderators (more than Twitter, which has exponentially more users) as well as cutting edge AI techniques to remove offensive content as quickly as possible," said BII.
Similarly, for investment in Sugar Cosmetics, it clarified that it is a woman-led manufacturing business with women comprising about 70% of its workforce in a country where the average female labour force participation rate is 28%.
"BII has investments in over 1,500 companies. When we take investment decisions, we place greater importance on the potential economic, social and environmental upside they can deliver, rather than the potential reputational downside to BII as an organisation," the DFI added.
Published by HT Digital Content Services with permission from VC Circle.