India: Investing And Operating In India's Education Sector – What You Need To Know

This article provides a brief overview of India's education sector, the key Indian statutory provisions governing the sector, the opportunities and key considerations which foreign educational institutions ("Foreign Institutions") and investors should consider prior to contemplating an education project in India.

Overview

Education in India is governed by both central and state legislations. The Ministry of Human Resource Development ("MHRD") is the primary body governing the education sector in India.

The Indian education sector is classified on the basis of its regulatory and non-regulatory structure. Primary, secondary and higher education falls within the ambit of the regulatory framework. Higher education, which includes bachelors/undergraduate degrees, masters/post-graduate degrees, pre-doctoral/doctoral programs and also diploma courses, is further divided into two segments (i) technical and (ii) non-technical. Technical education is regulated by the All India Council of Technical Education ("AICTE") and non-technical education is governed by the University Grants Commission ("UGC").

An educational institution providing primary, secondary or higher education is required to be set up as a not for profit entity1,. However, this should not put off for-profit operators or investors as there are still immense opportunities to invest in this sector by collaborating or partnering with Indian educational institutions ("Indian Institutions") for the provision of infrastructure and management services, entering into twinning or pathway programs2. The UGC Collaboration Regulations3 regulate and facilitate collaborations between Foreign Institutions and Indian Institutions intending to devise programmes for awarding degrees and post graduate diplomas, unless specifically covered by regulations formulated by AICTE. In terms of the UGC Collaboration Regulations, Foreign Institutions which have been accredited with top grades in their respective countries are allowed to collaborate with Indian Institutions having at least B-grade accreditation from the National Accreditation and Assessment Council. However, each collaboration still requires UGC's prior approval.

AICTE governs technical education institutions in India. The AICTE Technical Regulations4 provide a framework for Foreign Institutions/foreign universities intending to provide technical education leading to award of degree, diploma, post graduate diploma and post diploma level, under any mode of delivery system such as conventional/formal, non-formal and distance mode, by collaborating with Indian Institutions or on their own.

The un-regulated sector includes vocational training institutes, coaching classes, knowledge portals and online education portals. This un-regulated sector provides ancillary services to educational institutes, as well as to students and corporations by providing vocational and corporate training, coaching for exams and other ancillary educational services. However, such institutes cannot provide degrees or certifications as such degrees and certifications are not recognised. Investments can be made in the un-regulated sector through the formation of an education services company, collaborations or partnerships. Investments in the un-regulated sector can be carried out through for profit companies, allowing the distribution of profits.

Opportunities

Even though the primary, secondary and higher education sector is governed by a strict regulatory framework, the education sector has various opportunities for Foreign Institutions.

  • Public Private Partnership (PPP) – The PPP model involves private sector participation with the Government of India ("Government"). This is an effective structure through which investments can be made by upgrading infrastructure facilities of Indian Institutions and in certain scenarios arrangements can also be formulated between private investors and the Government, wherein the private investors also provide operation and management services for Indian Institutions along with the provision of infrastructure services, while the Government pays the private investors for the specified services
  • Strategic Partnerships – One of the other popular entry routes for Foreign Institutions in the education sector in India is through formulating strategic partnerships with Indian Institutions by signing Memorandums of Understandings in order to develop course curriculum, training (faculty and students), affiliations, undertake research and development projects and focus on industry issues, for example
  • Twinning or Pathway Programs – A twinning or pathway program is also a popular model in India whereby a student can complete part of the course with the Indian Institutions and the remaining part with the Foreign Institution. A twinning or pathway program can be implemented through collaboration or a partnership agreement. The UGC Foreign Collaboration Regulations govern the collaboration between Foreign Institutions and Indian Institutions
  • Education Services Company – In light of the present regulatory framework, investments can be made through an education services company providing managerial, administrative, infrastructure and other services to the entity set up to run the school, college or university in India
  • Technical Collaborations – Subject to the AICTE Technical Regulations, Foreign Institutions/ foreign universities can provide technical education leading to award of degree, diploma, post graduate diploma and post diploma level, either by collaborating with Indian Institutions or on their own
  • Other Collaborations – Such collaborations comprise of academic and financial collaborations between well-established Foreign Institutions/ foreign universities and Indian Institutions / Indian universities in order to facilitate greater academic exchange among students, distance education programs or setting up of an entity in India/entering into arrangements with Indian parties for assistance with student recruitment activities for universities abroad
  • Foreign Direct Investment (FDI) – Although the Government has approved FDI in the education sector, we have not seen a substantial inflow of foreign direct investment. The main reason for this is the not for profit restriction. There are also several conditions which are imposed by the regulatory framework making it strictly regulated
  • Setting up of Foreign University Campus – MHRD has proposed the regulations5 by which foreign universities can set up campuses in India and issue foreign degrees, subject to adhering to certain prescribed qualification norms. Once enacted, these regulations will provide a big leap to Foreign Institutions intending to set up campuses independently in India

Key considerations

  • Structuring – it is important to evaluate (i) the appropriate entry strategies/ suitable structure for India ventures (ii) the type of optimal Indian entity for undertaking Indian operations (iii) the relevant provisions of the current FDI policy along with the relevant pricing guidelines and other relevant foreign exchange laws, (iv) the implications of the provisions of the Foreign Contribution Regulation Act, 2010 prior to investing into any Indian Institutions, (v) the applicable provisions of the Companies Act, 2013, (vi) the corporate law flexibilities from the perspective of re-structuring in future, (vii) the options of raising funds from financial institutions (viii) suitable exit options forming part of definitive agreement, and (ix) tax efficiency etc
  • Regulatory requirements – The following regulatory factors need to be considered prior to making investments in the education sector:
  • The Foreign Institutions/ foreign universities will have to ensure compliance with the respective regulatory framework set up by AICTE and UGC prior to collaborating with Indian Institutions. Rules and regulations formulated by other state boards (under state acts/regulations/authorities) and statutory professional council boards will also have to be complied with
  • A Foreign Institution entering into a twinning or pathway program with an Indian Institution will be governed by UGC Collaboration Regulations. The UGC Collaboration Regulations prescribe the requirements of accredition, adherence to the standards laid down by regulatory bodies for imparting programmes of study, compliance with infrastructure requirements and compliance with RBI regulations, for both Foreign Institutions and Indian Institutions
  • Foreign Institutions/foreign universities intending to impart technical education, either by collaborating with Indian Institutions or on their own, shall be subject to the approvals and regulatory procedures stipulated in the AICTE Technical Regulations
  • The Constitutional provisions pertaining to the provision of educational facilities to certain sections of society as prescribed in the constitution of India will also have to be adhered to
  • Due diligence – Prior to undertaking an investment we recommend the Foreign Institution to undertakes a due diligence on its Indian partner to ensure that they are in compliance with (i) the central and state regulatory framework, (ii) applicable provisions under the Companies Act, 2013, (iii) foreign exchange laws, (iv) taxation laws, (v) conditions imposed under the various approvals obtained from regulatory authorities (such as UGC, AICTE, study professional councils, state boards etc.) and also for verifying the validity of such approvals etc. As discussed elsewhere in this newsletter it is also important that the Foreign Institution considers whether the proposed Indian partner is commercially the right partner for the project and that their interests are aligned
  •  Tax structuring – Tax implications under the Income Tax Act, 1961 will have to be considered keeping in mind the nature of the entity. A Foreign Institution intending to provide services through an education services company will be subject to taxation provisions as applicable to a corporate entity in India. Service tax will also be levied the services provided by the Foreign Institution

This update is authored by Clasis Law, Clyde & Co's associated firm in India

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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