1. INTRODUCTION
India has firmly established itself as a global powerhouse for technology, innovation, and operational excellence. Central to this transformation is the emergence of Global Capability Centres ("GCCs")—specialized hubs that multinational corporations use to manage core business functions, including technology development, research, analytics, and customer experience. Over the past 2 (two) decades, India has transitioned from being a costeffective outsourcing destination to a strategic partner in global value creation, with GCCs leading the charge.
Today, India is home to more than 1,500 (one thousand five hundred) GCCs, spanning diverse industries such as technology, financial services, pharmaceuticals, and consumer goods. These centres are no longer limited to support functions; they are innovation engines, driving strategic initiatives, digital transformation, and business agility for their parent organizations. As businesses worldwide navigate challenges like globalization, digital disruption, and talent shortages, India's GCC ecosystem offers a robust solution.
Recognizing the growing importance of GCCs in India's economic landscape, the Indian Government has announced in its 2025 budget that it will be rolling out a national framework to position the country as a leading destination for GCCs, with a particular focus on tier-2 city growth. This initiative is expected to further strengthen India's appeal as a global hub by expanding opportunities beyond traditional metropolitan centres and fostering a more inclusive and distributed innovation ecosystem.
The establishment and operation of these centres in India are governed by various legal, regulatory and tax framework that businesses must navigate carefully. From choosing the appropriate legal structure for setting up a GCC to understanding tax implications, employment laws, and intellectual property protections, a range of legal considerations come into play.
This article examines the legal landscape surrounding GCCs in India, focusing on the critical legal issues that multinational corporations must address when establishing and operating these centres. It also explores how India's evolving regulatory framework is shaping the future of GCCs and their contribution to the country's growing role in the global economy.
2. MODELS OF GCC IN INDIA
2.1. BUILD-OPERATE-TRANSFER
The build-operate-transfer ("BOT") model has gained significant traction as a preferred approach for mid-sized companies looking to have GCCs in India. The model offers a structured pathway to set up and operationalize a GCC while mitigating risks and optimizing costs, where a third-party service provider sets up and operates the GCC for a defined period of time before transferring ownership and control to the entity that originally established the GCC in its home country ("Overseas Parent Company" or "Client"). This model involves 3 (three) distinct phases- build, operate and transfer – each having its own legal implications and compliance requirements that warrant careful consideration as laid down in 3.1 below.
Some of the key advantages and disadvantages of the model are as follows:
| Advantages | Disadvantages |
|---|---|
| Low initial capital investment. | Transition phase can be complex, requires meticulous planning. |
| Service provider's local expertise can be utilised during setup and operation. | Higher risks to intellectual property and confidentiality, limited oversight over employees. |
| Allows for a quick launch in the market, compared to other options. | Service provider may not be able to maintain the culture and values that the overseas parent provides. |
2.2. DO-IT-YOURSELF
As the name suggests, the do-it-yourself ("DIY") model for setting up GCCs involves the Overseas Parent Company fully owning and managing the GCC. Unlike the BOT model, where external partners are engaged to build and operationalize the centre, the DIY model puts the Overseas Parent Company in full control of the process from inception.
| Advantages | Disadvantages |
|---|---|
| Extensive control over processes, workflows and data & IP security. | Requires upfront investment in registered office, IT equipment, office spaces, support employees, making setup and operational costs relatively high. |
| Permits GCC's activities to align closely with the Overseas Parent Company's culture and values. | Requires understanding of regulatory complexities. Some legal requirements, such as labour and real estate vary from state to state. |
| Direct physical oversight over human resource management. | Requires ongoing management of local challenges. |
2.3. OTHER HYBRID MODELS
Apart from the BOT and DIY models, companies may also choose to use 'employer-on-record ("EOR")' or 'professional employer organisation ("PEO")' arrangements, which combine elements of the aforementioned models. In this model, the service provider acts as the legal employer of the workforce, handling HR functions such as payroll, benefits, compliance, etc. However, the model is relatively uncommon in India. Accordingly, this article majorly discusses the BOT and DIY models of GCCs.
| Advantages | Disadvantages |
|---|---|
| Increased flexibility and scalability without local involvement | Service quality concerns with respect to support staff |
| Quick establishment with low initial capital investment | May prove costly for large number of employees |
| Can permit direct oversight over human resources | Added risks to intellectual property and proprietary information |
3. BOT MODEL – KEY CONSIDERATIONS
3.1. CORPORATE LAW COMPLIANCES
As the model involves the service provider building the GCC, the corporate law compliances are largely to be undertaken by the service provider. This arrangement stems from the service provider's role as the initial architect and operator of the GCC, making them accountable for regulatory adherence during the build and operate phases.
3.1.1. Build phase
Setting up a GCC can take one of 2 (two) forms – either as a separate legal entity, or a division within the existing service provider's legal entity.
i. Separate legal entity
Forming a separate entity may be slightly time consuming in the short term, by taking time to set up, requiring capital infusions and deputation of personnel as directors, along with the legal compliances associated with running the venture such as filing returns with governmental authorities. However, it permits a relatively easier transfer phase, when such time comes.
A separate legal entity is typically structured as either a private limited company or a limited liability partnership ("LLP"). While other forms of entities (such as a branch office) exist, it is preferable to use a private limited company or an LLP due to the wide range of activities they may pursue, ease of transfer of undertaking, and permissibility of foreign investment. Some key compliances of these structures are discussed below:
| Private Limited Company | LLP | |
|---|---|---|
| Oversight and regulation | Regulated by the Ministry of Corporate Affairs ("MCA") and the Registrar of Companies ("ROC") under the Companies Act, 2013 ("Companies Act"). | Regulated by the MCA and the ROC under the Limited Liability Partnership Act, 2008. |
| Cost of setting up the entity | Nominal registration fees payable at applicable rates calculated on the amount of authorized capital of the company. Private companies are exempt from having a minimum paid up capital. | Nominal registration fees payable based on capital contribution. No minimum paid up capital requirement for incorporation. |
| Number of directors / partner / members | The company should have a minimum of 2 (two) directors (1 (one) mandatorily Indian resident) and have 2-200 (two to two hundred) members excluding employees. | The LLP should have a minimum of 2 (two) designated partners (1 (one) mandatorily Indian resident) with no upper limit. |
| Requirement for meetings | 4 (four) mandatory board meetings (1 (one) in every 120 (one hundred twenty) days) and 1 (one) mandatory shareholders' meeting in a financial year. | There are no statutory requirement of statutory meetings to be maintained. |
| Charter documents | Governed by memorandum of association and articles of association | Governed by partnership deed |
| Timeline for setting up | Varies upon factors such as complexity of memorandum and articles, time taken for choosing registered office, number of non-resident directors and first subscribers. Can take from 1-3 (one to three) months. | Relatively shorter than company, 1-2 (one to two) months. |
| Applicable tax rate1 | 22%2 (twenty two percent | 30% (thirty percent) |
| Dividend distribution |
Dividend declared, distributed or paid is taxable in the hands of shareholder. A non-resident shareholder shall be liable to pay tax on dividend income, at the rate of 20% (twenty percent) plus applicable surcharge and cess. However, this is subject to tax treaty benefit, if any, available to the nonresident shareholder A private limited company is under an obligation to withhold appropriate tax on dividend income. |
Distribution of profit by LLP to its partners, is exempt from tax in accordance with the provision of Section 10(2A) of the IT Act. Further, there will be no withholding tax implication in the hands of LLP on distribution of profits to the partners of the LLP. |
Apart from the above-stated compliances, private limited companies are also required to make periodical regulatory filings with the MCA and ROC. Primary compliance obligations include the submissions of annual financial statements, director-related filings such as appointments, modification to registered office and/ or any amendments to constitutional documents of the company, maintenance of statutory registers, conducting mandatory audits, filing tax returns, and maintaining proper documentation of board and shareholder meetings.
ii. Division within the same legal entity
In contrast with a separate legal entity for setting up the GCC, a division within the same entity can be significantly cheaper in the short term and allow for a quick turnaround for a potential client. However, certain shortcomings exist in the form of intellectual property risks and dependency on the Overseas Parent Company's operations. A division within the same entity will also reduce the potential to inculcate any Client requirements regarding benefits to be provided to employees, company values and culture, etc. A separate division within the same entity will also bring forward a relatively more complex transfer mechanism (discussed below in section 3.1.3 below)
From the perspective of the Client, conducting a limited legal due diligence to ensure that the service provider is legally permitted to provide the said services is of importance. Having strong and detailed contractual arrangements with the service provider that define the terms of setup, operation, and transfer are necessary once a service provider is chosen. These should detail specific timelines, performance metrics, intellectual property protection and confidentiality requirements.
3.1.2. Operate phase
The operate phase involves legal compliance by the service provider alone and relatively less legal aspects are to be considered by the Client at this stage. The service provider should ensure meticulous legal compliance, as the Client may be likely to conduct due diligence prior to the transfer and seek indemnities for any potential legal violations.
From the perspective of the Client, it is beneficial to require the service provider to provide regular legal compliance reports (including material such as challans, filings, etc.), to ensure that the GCC entity has no legal liabilities at the time of the transfer of the undertaking. Such aspects should be discussed and agreed upfront so that the periodical compliances are undertaken properly and effectively.
3.1.3. Transfer phase
The transfer phase will vary significantly depending on whether a separate legal entity or a division within the same legal entity is chosen at the time of the build phase.
A brief comparison of the key factors is provided below:
| Separate Entity | Division within Service Provider | |
|---|---|---|
| Legal Complexity | Minimal (share transfer) | High (carve-out, new entity establishment may be required) |
| Form of contract | Share purchase agreement | Business transfer / asset purchase agreement |
| Operational Continuity | Entity and operations remain intac | Infrastructure and employee migration may be involved |
| Employee Retention | Minimal change for employees immediately, attrition risks lower | Risk of attrition high since employee consent for the transfer may be involved |
| Time Required | Shorter | Longer |
| Integration Effort | Moderate (policy and culture alignment possible from day 1 (one)) | High (operational and structural setup required, shift from service provider to client's culture) |
| Tax impact | Share transfer is generally taxable as "capital gains" income. However, a factual analysis is needed to determine factors such as manner of holding, holding period, tax treaty benefits, valuation requirements, withholding tax implications. | The tax considerations for both the buyer and the seller will differ depending upon the mode of transfer, that is, either as a business transfer or an asset sale. |
In terms of foreign exchange compliance, acquisition of an Indian entity's shares requires compliance with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, which stipulates, inter alia, pricing guidelines, reporting requirements, etc. It may be noted that under Indian foreign exchange laws, a non-resident entity is not permitted to conduct business operations in India without having a place of business in India.3 Accordingly, a non-resident is not permitted to directly acquire an Indian business undertaking. To consummate a business / asset transfer, it has to first establish an Indian entity (which, similar as above, involves compliance with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019) and then use such Indian entity for the acquisition.
In either case, acquisition agreements will have to be drafted that clearly outline the terms of the transfer from the service provider to the Client. The operations of the service provider and periodical legal compliances being undertaken will be required to be reviewed to limit liability upon the client. If any contracts require intimation or consent from the counterparty as a consequence of the acquisition of the undertaking, the same will be required to be obtained by the service provider and evidenced to the Client.
3.2. LABOUR LAW REQUIREMENTS
Labour law compliance in the BOT Model requires careful navigation of both central and state-level statutes, requiring a comprehensive understanding of these laws to mitigate the risk of non-compliance, with a key focus on employee protection during business transfers. Some key labour law compliance requirements from a BOT model perspective are highlighted below:
- The Client must ensure that employment contracts entered into between the service provider and its employees are meticulously drafted to include sufficient safeguards such as confidentiality, noncompete, intellectual property, and non-solicitation, providing the Client with protection against potential risks.
- In the event of a transfer of an undertaking, Section 25FF of the Industrial Disputes Act, 1947 outlines key employee protection requirements. Under the provision, the employer must comply with certain conditions including ensuring continuity of service and providing terms of employment that are similar to or better than the existing employment terms. If these conditions are not met, the employer may be liable to pay retrenchment compensation (calculated at 15' (fifteen) days average pay for every year of continuous service). In practice, companies the 'resign-and-rehire' and 'tripartite transfer' arrangements are common for employee transfers. The Client should carefully evaluate these obligations during any business transfer to ensure compliance and mitigate the risk of legal disputes.
- To ensure seamless employee retention post-transfer, the agreement between the service provider and the Client must incorporate clear provisions to include incentives, retention bonuses, and transfer of employee benefits, ensuring minimal disruption and business continuity.
- The Client must negotiate comprehensive indemnity provisions with the service provider to cover potential employee-related claims during the agreement term and post-termination period (generally 1-3 (one to three) years). These claims may include wrongful termination, wage disputes etc. Given the longtail nature of such claims, indemnity coverage must account for immediate and future liabilities, while appropriate limitation of liability provisions must be incorporated to mitigate financial and legal risks.
Footnotes
1. The tax rates are without applicable surcharge and cess.
2. The beneficial tax rate of 22% is applicable only upon fulfilment of certain conditions as prescribed under section 115BAA of the Income Tax Act, 1961 ("IT Act").
3. It may be noted that a foreign company can also choose non-incorporated forms of business such as a liaison office, project office or a branch office to carry out business in India. However, the scope of activities for these forms of business is relatively narrow, making them unsuitable for GCCs.
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