GENERAL INDUSTRY BACKGROUND

The education sector in India is undergoing a gradual makeover since the last few years. Once viewed largely as a charitable or philanthropic activity, it has since metamorphosed into an 'industry' in its own right. Thus far, basic primary education and certain technical institutions for higher education, like the Indian Institutes of Technology and the Indian Institutes of Management have been the mainstay of the Indian education sector. However, due to the rapidly globalizing competitive marketplace, coupled with the increasing need to expand quality education at the grassroots level and spur innovative thoughts, the education sector in India has slowly but surely set itself on the path of modernization. The private sector is leading the way. Several well-known private equity and venture capital funds have also shown interest in the education services and traditional education space. Education is a unique opportunity since it balances investor returns with social responsibilities and aims to uplift communities.

Various segments of the education sector may be represented in the form of a pyramid with the bottom of the pyramid being the least regulated and the top being the most regulated:

IMPORTANT TRENDS IN THE INDUSTRY

  • The K-12 segment and the higher education segment have been garnering the attention of private equity players, despite institutions in such segments being required to maintain a not-for-profit character.
  • With the increase in affordability and the need for quality education, international schools (schools affiliated with international boards) are also gaining popularity in the urban centers.
  • Foreign/international education providers have shown a lot of interest in education in India. We have seen various forms of collaborations. A reformed regulatory environment is however missing and grey areas make it difficult to function without risk.

India needs to adopt reforms in the education sector at a fast pace. Use of technology in providing online and distance education can be a big game changer in India. In our view, the government needs to improve and support the government education network and at the same time free the private education sector from its current regulatory shackles.

MAJOR PLAYERS IN INDIA1

Some of the successful higher education private sector institutions include Manipal University, Amity University and the Indian School of Business.

Private equity funds such as Premji Invest, Avendus, Kaizen PE, Matrix Partners and Gaja Capital have been focusing on the education sector.

IMPORTANT LAWS2

University Grants Commission Act, 1956

  • Makes provisions for the co-ordination and determination of standards in universities through the University Grants Commission, which Commission's mandate includes determining and maintaining standards of teaching, examination and research in universities; and framing regulations on minimum standards of education

University Grants Commission (Institutions Deemed to be Universities) Regulation, 2010

  • Prescribes certain requirements to qualify for the grant of status as a deemed university

University Grants Commission (Establishment of and Maintenance of Standards in Private Universities) Regulations, 2003 and separate State Acts

  • Govern the setting up of private universities (each State may have a separate Act/policy governing the setting up of private universities)
  • Prescribe conditions and requirements to be fulfilled for setting up as well as maintaining a private university

University Grants Commission (Promotion and Maintenance of Standards of Academic Collaboration between Indian and Foreign Educational Institutions) Regulations, 2016

  • Regulates twinning programmes for non-technical courses in India
  • Mandates Indian and foreign universities to comply with a number of pre-conditions for collaboration

All India Council for Technical Education Regulations for Entry and Operations (Grant of Approvals for Technical Institutions) Regulations, 2011

  • Regulates the setting up of technical institutions and prescribes conditions to be observed and satisfied by such institutions
  • Applies to foreign universities/institutions interested in imparting technical education in India leading to the award of diplomas, degrees, etc. and even facilitates/regulates collaborations and partnerships between Indian and foreign universities/institutions.

Central Board of Secondary Education Affiliation Bye-laws/Council for the Indian School Certificate Examinations Guidelines for Affiliation/separate State Acts, Rules, Regulations, etc.

  • Prescribes conditions and requirements to be fulfilled for setting up schools/for being affiliated with the Central Board of Secondary Education/the Council for the Indian School Certificate Examinations/State Board (each State may have a separate Act/Board governing the setting up/affiliation of schools)
  • International schools would have to fulfill the criteria set out by the concerned international board.

Exchange Control Regulations

  • The Foreign Exchange Management Act, 1999 (FEMA) governs the transfer of foreign exchange into and out of India. The FEMA confers on the Reserve Bank of India the power to frame detailed regulations with regard to various aspects of exchange control.

TAXATION3

Income Tax Act, 1961

  • It is a tax on income imposed by the Central Government
  • Residents in India are taxed on their worldwide income
  • Non- residents are taxed on Indian source of income
  • The Indian tax rates applicable to non-residents could be up to 40% (excluding applicable surcharge)
  • Interest received by a non-resident from India on Indian or foreign currency denominated loans may be taxable
  • Payments towards royalty and fees for technical services is taxable at the rate of 10% (excluding applicable surcharge).
  • Expenditure on scientific research is treated as capital expenditure and is deductible, though the extent to which deduction can be claimed would reduce over the years as per a recent amendment in 2016.

Transfer Pricing Regulations

  • Income tax Act makes provisions for taxation of income arising from international transactions between associated enterprises
  • Transfer Pricing Regulations lay down that any income arising from such an "international transaction" shall be computed having regard to the "arm's length price"
  • The Transfer Pricing Regulations also lay down methods for calculation of arm's length price

Research and Development Cess Act, 1986

  • All payments made towards the import of technology are subject to a tax of 5% under the Act
  • Technology includes any special or technical knowledge or any special service required for any purpose whatsoever by an industrial concern under any foreign collaboration, and includes designs, drawings, publications and technical personnel

Service Tax

  • Under the current service tax regime, all services are taxable unless included in the negative list or exempt. The rate of service tax is 15%.
  • Exempted services include: (i) pre-school education and education up to higher secondary school or equivalent; (ii) education as a part of a prescribed curriculum for obtaining a qualification recognized by law for the time being in force; (iii) education as a part of an approved vocational education course; and (iv) auxiliary educational services provided to or by an educational institution in respect of education exempted from service tax.

REGULATORY AGENCIES4

University Grants Commission (UGC)

The UGC was set up under the University Grants Commission Act, 1956 to make provisions for the co-ordination and determination of standards in universities. Its mandate includes:

  • Promoting and coordinating university education;
  • Determining and maintaining standards of teaching, examination and research in universities;
  • Framing regulations on minimum standards of education;
  • Monitoring developments in the field of collegiate and university education;
  • Disbursing grants to the universities and colleges;
  • Serving as a vital link between the Central and State Governments and institutions of higher learning;
  • Advising the Central and State Governments on the measures necessary to improve university education.

All India Council for Technical Education (AICTE)

The AICTE was set up under the All India Council for Technical Education Act, 1987 (AICTE Act) with a view to ensure:

  • Proper planning and coordinated development of the technical education system throughout the country;
  • Qualitative improvement of such education in relation to planned quantitative growth;
  • The regulation and proper maintenance of norms and standards in the technical education system.

Distance Education Bureau (DEB)

  • The Distance Education Council (DEC) which was set up under the Indira Gandhi National Open University Act, 1985, for the purpose of co-ordination and determination of standards of teaching, evaluation and standards in the open and distance learning (ODL) model of education in India.
  • The DEC has been dissolved and all regulatory functions are being undertaken by the UGC
  • The UGC is in the process of framing new Regulations for Distance Education
  • Till such time the new Regulations of the UGC are notified, the guidelines of the erstwhile Distance Education Council with regard to recognition of ODL institutions shall be implemented for the purposes of grant of permission to institutions for Distance Education programmes

Statutory Professional Councils

Statutory Professional Councils are responsible for recognition of courses, promotion of professional institutions and providing grants to undergraduate programmes and various awards. The Medical Council of India, for instance, is empowered to prescribe minimum standards for medical education required for granting recognized medical qualifications by universities or medical institutions in India. It is also responsible to give its recommendations to the Government for establishing new medical colleges. Similarly we have other statutory councils, some of which are as follows:

  • Indian Council for Agricultural Research
  • National Council for Teacher Education
  • Dental Council of India
  • Pharmacy Council of India
  • Indian Nursing Council
  • Bar Council of India
  • Central Council of Homeopathy
  • Central Council for Indian Medicine
  • Council of Architecture
  • Rehabilitation Council
  • National Council for Rural Institutes
  • State Councils of Higher Education

Each of these statutory councils has been empowered to prescribe standards and formulate regulations with respect to their field of jurisdiction.

Central Board of Secondary Education (CBSE)

The CBSE functions under the overall supervision of the Controlling Authority which is vested with the Secretary of Education, Ministry of Human Resource Development, Government of India. It was set up with the view of

  • prescribing conditions of examinations and conducting public examination at the end of Class X and XII;
  • granting qualifying certificates to successful candidates of the affiliated schools;
  • prescribing and updating the course of instructions of examinations;
  • affiliating institutions for the purpose of examinations and to raise the academic standards of the country.

schools intending to partake in the pattern of examinations prescribed by the CBSE are required to be associated or affiliated with the CBSE.

State Boards (under State Acts/Regulations/Authorities)

Education is governed by both the Central and the State Governments. While boards such as the CBSE prescribe standards for education under the aegis of the Central Government, the State Governments regulate the education sector within their respective States through State-specific legislations.

CONCLUSION

Although investment in the sector may be plagued with challenges (in terms of investing, extracting returns and exiting), it offers great opportunity to investors. A number of studies and reports indicate the strong returns that could be expected from the sector. With about 50% of India's population being below the age of 25 years and the presence of a severe shortage of institutions delivering high quality education and training across segments, what is present before the investors is a timely opportunity. With good foresight, strategic planning and by retaining legal counsel with prior experience in dealing with these issues, investors interested in investing in education could overcome these challenges and generate favorable returns.


1 The list herein is not meant to be exhaustive

2 The list herein is not meant to be exhaustive

3 The list herein is not meant to be exhaustive

4 The list herein is not meant to be exhaustive

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