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GENERAL INDUSTRY BACKGROUND
The Indian education sector is undergoing a paradigm shift, to help the country in achieving its aim of becoming a global education hub. With the help of forward-looking policy initiatives and recent policy changes, the sector, which was once viewed largely as a charitable or philanthropic activity, has since metamorphosed into an 'industry' in its own right.
The various segments of the education sector in India can be broadly categorized as follows:
2. Primary to Secondary school or K-12
3. Higher education
4. Vocational/skill-based training
The recent National Education Policy, 2020 (“NEP”) released by the Government is set to be a groundbreaking development in the sector, and will have an impact across all segments of education. There is not only an emphasis on holistic and multidisciplinary learning, but also on technological integration. The Government seeks to introduce Early Childhood Care and Education, and regulate education right from pre-primary levels with an emphasis on holistic learning.
The past few years have seen immense private sector involvement in K-12 sector. Ranging from low-cost schools, to premier schools, the private sector has played a pivotal role in improving the quality of education and enrollments at the school level. The current 10+2 framework at the school level is soon set to be replaced with a 5+3+3+4 structure to promote better overall learning and well-being. The recent growth of EdTech in India has also enhanced teaching and learning, resulting in more student engagement even outside of school. The goal of the government is to achieve 100% Gross Enrolment Ratio in preschool through secondary school by 2030.1
There has been a noticeable shift in higher education as well. There has been increasing adaptability towards skill learning for better job prospects, in addition to traditional university education. The regime on online education has been drastically changed. Regulations now provide legal recognition to some online degree programmes in India. In addition, autonomy has been given to several universities across the country to improve enrollments. There is also an increasing push by the government to have large multidisciplinary universities with focus on research, liberal arts, skill based, employment oriented new-age learning by 2030.2
Higher education is to be made more flexible, with students having the choice to pursue subjects from various disciplines. Further, the NEP seeks to (i) establish ‘light but tight’ regulation through a single regulator for higher education; (ii) support online education and open and distance learning; and (iii) increase collaboration between Indian and foreign universities in academics and research. There is also a proposal to allow top 100 foreign universities to open campus in India.
The use of technology in each aspect of education sector has also resulted in a boom for EdTech in India. The recent regulations on online education has opened up avenues for numerous players in the sector, both domestic and foreign. Collaborations with foreign institutions, EdTech platforms and the like have received a boost, and these regulations could prove to be crucial for realizing the potential of EdTech in India.
Investment in education has also been on the rise. The India Brand Equity Foundation estimates that India’s education system is the largest in the world, with a population of 500 million between the age group of 5-24.3 Because of the sheer size of the sector, and the progressive regulations, several well-known private equity and venture capital funds are showing interest in education sector resulting in rise in deal making in the industry. From April 2000 to June 2020, the education sector in India witnessed an inflow of USD 3.29 billion as Foreign Direct Investments (“FDI”).4
In addition to traditional investment structures, impact investment in the education space has also gained popularity, with investor interests being balanced with societal good.
IMPORTANT TRENDS IN THE INDUSTRY
- The Government has sought to overhaul all segments of the education sector in India through the NEP, and many forward-looking regulations can be expected in the near future.
- There is also a notable rise in the number of both school chains and low-cost private schools.
- The number of M&A deals in the education sector has been on the rise. The K-12 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 in most Indian states.
- The UGC has overhauled the online education and open and distance learning regime through new regulations in 2020. While online education was already growing, these regulations have opened up new opportunities for collaboration with FEIs, online learning platforms and other service providers. Students, especially those who are unable to access physical centres, can enroll in online programmes because of their online accessibility, flexibility, and personalized experience.
- The Government is also paving the way for top 100 foreign universities to set up institutions in India.
- There are more than 4,530 EdTech start-ups which are active in India currently, with more than 400 such start-ups having been founded in the last 2 years.5
- While a 2017 report published by KPMG states that the online education industry in India is expected to grow to USD 1.96 billion and 9.6 million paid users by 2021,6 these estimates may even be surpassed given the impact of Covid-19 and the recent online education regulations.
IMPORTANT LAWS and regulatory bodies7
- Except a few states (e.g. Delhi, Karnataka, Tamil Nadu to name a few), the day-care and pre-school segment is largely unregulated in India.
- The NEP has proposed a National Curricular and Pedagogical Framework for Early Childhood Care and Education for children up to the age of 8, to be developed by the National Council of Educational Research and Training. There will be sub-frameworks for 0-3 year olds and 3-8 year olds, and the emphasis will be on flexible, multi-faceted, play-based and activity-based learning for the holistic development of a child.
II. Primary and Secondary Education
- Unlike pre-schools, primary and secondary education in India is subject to regulatory control. Educational institutions need to comply with central as well as state-specific regulations.
- Under Indian laws, an educational institution can only be set up in the form of a non-profit entity i.e. either as a charitable trust, a society or a Section 8 Company (a non-profit company under the Companies Act, 2013), except in the state of Haryana where private companies can also set up schools.
State Specific Requirements
- There are state specific requirements on private schools for obtaining prior permission/registration in order to establish, administer or maintain a school.
- Once established, schools are required to obtain a ‘No Objection Certificate’ (“NOC”) from the concerned State Education Department before the school can commence operation or be affiliated with one of the boards (such as CBSE8/ IGCSE9/ IB10/ CISCE11/ state board (as discussed below)) to ensure recognition and qualification of education provided by the school.
The Right of Children to Free and Compulsory Education Act, 2009 (“RTE Act”)
- Requires all schools to obtain a certificate of recognition from the concerned authority for the establishment or functioning of a private school12. In order to obtain the certificate of recognition, a school is required to fulfill the norms and standards set out under the Schedule to the RTE Act. Failure to obtain a certificate of recognition under the RTE Act would attract penalties.
- Requires unaided private schools not receiving any kind of aid or grants from the Government (except unaided minority schools having appropriate recognition) to reserve at least 25% of the strength of a class for children belonging to weaker sections and disadvantaged groups in the neighborhood and provide free and compulsory elementary education to such children.13 The expenditure incurred by an unaided school is required to be reimbursed by the Government to the extent of per-child-expenditure incurred by the state or the actual amount charged from the child, whichever is less.
- Prohibits the charge of any capitation fee by any private or government school and stipulates imposition of penalty on contravention.
- Prohibits all schools from subjecting any child or its parents to any method of selection for admission of a child, in preference over another, other than a random method.
CBSE Bye-Laws / CISCE Guidelines for Affiliation / IB / IGCSE / State Boards
- Prescribe conditions and requirements to be fulfilled for being affiliated with the CBSE / CISCE / IB / IGCSE / State Board (each State may have a separate Act/Board governing the affiliation of schools).
Regulation of fees and capitation
- Private unaided schools are free to determine their own fees, provided it does not result in profiteering and commercialization.14 However, the relevant state authorities may assess fee structures to ensure reasonableness.
- Certain states like Maharashtra, Gujarat and Andhra Pradesh regulate the fees that can be charged by private unaided schools through state level fee regulation laws.
- Capitation which is any amount, whether in cash or kind, in excess of the fees, regardless of the term given to it, is prohibited and is also punishable under the RTE Act and state laws.
III. Higher Education
The higher education segment in India is typically divided in two broad segments: (i) regulated; and (ii) unregulated.
(A) Regulated Sector
This segment includes:
- bachelor’s/undergraduate degree courses
- master’s/post-graduate degree courses
- diploma courses
- pre-doctoral/doctoral programmes
- online education programmes (non-technical courses)
(a) Regulatory Bodies
In India, there are different bodies/authorities regulating higher education, as indicated below:
University Grants Commission
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 (details of which are provided below);
- 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. The AICTE Act defines “Technical Education” to include programmes of education, research and training in engineering technology, architecture, town planning, management, pharmacy and applied arts and crafts and other programmes as declared by the Central Government15;
- The regulation and proper maintenance of norms and standards in the technical education system;
The AICTE regulates the institutions, other than universities, conducting the courses or programmes in the field of Technical Education. Courses in technical programmes cannot be offered without prior permission of the AICTE.
Statutory Professional Councils
Statutory professional councils have been empowered to prescribe standards and formulate recognition of courses, promotion of professional institutions and providing grants to professional undergraduate programmes and various awards, in their fields of jurisdiction. Some of the major statutory councils are National Medical Commission, Bar Council of India, Dental Council of India16, Indian Nursing Council17, etc.
(b) Important laws18
UGC (Establishment of and Maintenance of Standards in Private Universities) Regulations, 2003 and separate State Acts
- Prescribe conditions and requirements for setting up and maintaining private universities (each State may have a separate Act/policy governing the setting up of private universities).
UGC (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.
AICTE (Grant of Approvals for Technical Institutions) Regulations, 2016
- Facilitates the entry of foreign institutes in India by way of collaboration with Indian educational universities/institutions, for imparting technical education leading to the award of diplomas, degrees, etc.
- As per this regulation, prior approval of AICTE is required for collaboration and twinning programme between Indian and foreign universities/institutions in the field of technical education, research and training. Additionally, the AICTE releases an Approval Process Handbook every year which, amongst other things, provides comprehensive information with respect to the requirements of AICTE and the approval process.
The Institutions of Eminence Regulations/Guidelines
- The UGC issued the UGC (Institutions of Eminence Deemed to be Universities) Regulations, 201719 for private institutions and the UGC (Declaration of Government Educational Institutions as Institutions of Eminence) Guidelines, 201720 for public institutions, to enable them to attain Institute of Eminence (“IoE”) status.
- The Government has identified 10 public institutions and 10 private institutions for grant of IoE status.21
- The IoEs recognized under this initiative have complete financial autonomy and are exempted from certain UGC norms such as those in respect of admission of foreign students, recruitment of foreign faculty admission fee, course structure and have the freedom to enter into academic collaboration with the top 500 higher globally ranked educational institutes.
UGC (Categorization of Universities (only) for Grant of Graded Autonomy) Regulations, 2018 (“Grant of Graded Autonomy Regulations”)
- Grant of Graded Autonomy Regulations provide autonomy to the universities based on quality benchmarks and categorizes them into three categories – Category I, II and III based on certain benchmarks.22
- Category I & II universities can hire foreign faculty, without approval of the UGC, who have taught at an institution appearing in top five hundred of any of the world-renowned ranking frameworks.
- Category I universities may engage in academic collaborations with the top 500 foreign educational institutions without approval from the UGC.23
UGC (Conferment of Autonomous Status upon Colleges and Measures for Maintenance of Standards in Autonomous Colleges) Regulations, 2018 (“Autonomous Colleges Regulations”)
- An autonomous college is free to start diploma (undergraduate and postgraduate) or certificate courses without approval of the university and can issue diplomas and certificates under the seal of the college.24 Additionally, an autonomous college can also start a new degree or postgraduate/Ph.D. course or certificate with the approval of the academic council of the college and concerned statutory council, provided that such courses fulfils the minimum standards as prescribed by the university/ UGC.
- Autonomous colleges have the freedom to design their course, curriculum, fix fees of the courses at their own level, have flexible teaching methods and modules, and have complete administrative autonomy, unlike affiliated colleges.
UGC (Institutions Deemed to be Universities) Regulation, 2019 (“Deemed Universities Regulations”)
- Prescribes certain requirements to qualify and procedure for the grant of status as a deemed university, among other things.
- The status of deemed university granted to such institutions is initially made for a period of 5 years on the basis of the satisfactory performance and compliance with the provisions of the Deemed Universities Regulations.
- A deemed to be university can also offer courses in the open and distance mode or online mode in accordance with the relevant UGC regulations.
UGC (Open and Distance Learning Programmes and Online Programmes) Regulations, 2020 (“ODL and Online Regulations”)
- On September 4, 2020, the UGC notified the ODL and Online Regulations which supersedes the UGC (Open and Distance Learning) Regulations, 2017 and the UGC (Online Courses or Programmes) Regulations, 2018.
- The ODL and Online Regulations is applicable only to undergraduate and post graduate degree programmes and post graduate diploma programmes. It excludes programmes like engineering, medicine, law, dental, pharmacy and research-based programmes such as PhD and any other programme not allowed by any regulatory body to be offered in open distance learning or online form.
- Allows for provision of degrees through open and distance learning programmes and through online programmes.
- Allows higher educational institutions (“HEIs”) having NAAC score of 3.26 and above or ranked in top-100 in University category of NIRF, at least twice in three preceding cycles, to start full-fledged online programmes, without prior approval of the UGC but with the approval of the programmes from its statutory authorities and in compliance with this regulation.25 Further, HEIs which do not satisfy these criteria but meet the criteria laid down under the ODL and Online Education Regulations, can also obtain approval from UGC to offer programmes through online mode.26
- The ODL and Online Regulations apply to an Indian University27 and an Institution Deemed to be a University.28 They currently do not extend to programs offered by the foreign education institutions in India. However, an Indian HEI can enroll international learners for online programmes in accordance with the ODL and Online Regulations.29
B. Unregulated Sector
The unregulated sector primarily comprises of:
- certification courses not leading to the award of a degree or diploma
- vocational education and training
- tutoring services / coaching classes
Due to the growth of the unregulated education sector and heavy enrollments, there has been a move to regulate some segments of this sector as well. For instance, tutoring classes are regulated in some states in India now.30 The regulations however are not compliance-heavy.
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 and cess).
- Interest received by a non-resident from India on Indian or foreign currency denominated loans may be taxable in India.
- Payments towards royalty and fees for technical services to non-residents is taxable in India at the rate of 10% (excluding applicable surcharge and cess).
- Expenditure on scientific research is deductible, though the extent to which deduction can be claimed would reduce over the years as per an amendment in 2016.
- FEIs with ‘business connections’ have their net incomes taxed at 40%, depending on the extent attributable to such ‘business connection’. ‘Business connection’ has been expanded to cover non-resident companies with significant economic presence (“SEP”) in India. Amongst other things, a non-resident company can form an SEP in India if it carries out certain transactions in respect of digital services including provision of download of data/software in India or carries out systematic and continuous solicitation of its business activities in India or engaging in interaction with users in India, through digital or any other means. Non-resident EdTech companies providing digital services in India may run the risk of constituting a ‘business connection’ in India by virtue of the concept of SEP. Importantly, although it was introduced through the Finance Act, 2018, the implementation of SEP has been postponed to April 202132 in light of the evolving global discussions at the Organisation for Economic Co-operation and Development and the global level with respect to taxation of the digital economy.
- An Association of Persons (“AoP”) is a separate taxable entity and is considered to be resident in India even if a part of its control and management is situated in India. Collaboration arrangements between the FEI and Indian educational institutes run the risk of constituting an AOP.
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" and also lay down methods for calculation of arm's length price.
Taxation under Goods and Services Tax (“GST”)
- Consideration paid by Indian entities for services rendered by FEIs shall be subject GST33 at the rate of 18%34.
- Equalization Levy (“Levy”) was introduced in 2016. When introduced in 2016, the Levy was a 6% tax “on consideration received or receivable for any on consideration received or receivable for any specified services” which currently includes “online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement”. An FEI providing online advertisement services to an education services company in India, could be caught within the Levy. However, the Levy does not apply to non-resident companies that constitute a PE in India under the relevant tax treaty.
- Through Finance Act, 2020, the scope of the Levy was expanded to cover non-resident e-commerce operators making supplies in India or having a nexus with India by imposing a 2% levy on the amount of consideration received or receivable by an ‘e-commerce operator’ from ‘e-commerce supply or services’ made to an Indian resident or a non-resident in certain cases such as sale of advertisement / data involving Indian residents. The definition of e-commerce operators is very wide35 and is likely to cover online services to be provided by FEIs.
Although the education sector in India faces certain challenges (in terms of regulations, extracting returns, sale and exits, etc.), it offers great opportunity nonetheless. 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 years36 and 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 Paragraph 3.1, NEP.
2 Paragraph 10.7, NEP.
3 See: https://www.ibef.org/industry/education-sector-india.aspx (last visited on December 29, 2020).
4 Fact sheet on FDI from April, 2000 to June 2020, available at https://dipp.gov.in/sites/default/files/FDI_Factsheet_June20_20October2020.pdf, (last visited on December 29, 2020).
5 See http://www.businessworld.in/article/EdTech-Market-Is-Booming-In-India-/20-09-2020-322696/ (Last visited on December 29, 2020).
6 Online Education In India: 2021, A study by KPMG in India and Google, published on May 2017, available at https://assets.kpmg.com/content/dam/kpmg/in/pdf/2017/05/Online-Education-in-India-2021.pdf (last visited on December 29, 2020).
7 The list herein is not meant to be exhaustive.
8 Central Board of Secondary Education
9 International General Certificate of Secondary Education
10 International Baccalaureate
11 Council for the Indian School Certificate Examinations
12 Section 18 of the RTE Act.
13 Section 12(1)(c) of the RTE Act
14 Vibgyor High School v, The State of Maharashtra, (2012) 114 BOMLR 270, Para 31.
15 Section 2(g) of the AICTE Act.
16 In January 2020, the Union Ministry of Health and Family Welfare put in the public domain the draft National Dental commission Bill 2020, a bill aimed at replacing the Dental Council of India and replacing it with National Dental Commission.
See the press release here https://main.mohfw.gov.in/sites/default/files/Public%20Notice%20for%20NDC.pdf (last visited on December 29, 2020).
17 The Ministry of Health and Family Welfare has proposed to replace the Indian Nursing Council with a statutory authority through the National Nursing and Midwifery Commission BiIl, 2020.
18 This list is not meant to be exhaustive.
19 See https://www.ugc.ac.in/pdfnews/5403862_Gazette-Institutions-of-Eminence-Deemed-to-be-Universities.pdf (last visited on December 29, 2020).
20 See https://www.ugc.ac.in/pdfnews/2170800_Guidelines-for-Educational-lnstitutions-as-lnstitutions-of-Eminence-2017.pdf (last visited on December 29, 2019).
21 See https://pib.gov.in/PressReleseDetailm.aspx?PRID=1581182 (last visited on December 29, 2020)
22 See https://www.ugc.ac.in/pdfnews/1435338_182728.pdf (Last visited on December 29, 2020)
23 Regulation 4.0, Grant of Graded Autonomy Regulations
24 See UGC Guidelines for Autonomous Colleges 2018 , available at: https://www.ugc.ac.in/pdfnews/2239254_ FinalRevisedGuidelinesAutonomousColleges19-01-2018.pdf (Last visited on December 14, 2020)
25 Regulation 3(b)(i) of the ODL and Online Regulations.
26 Regulation 3(b)(ii) of the ODL and Online Regulations. Some of the criterion are existence of at least 3 years should be accredited to the NAAC and have a score of at least 3.01 or rank in top 100 in University category of NIRF for at least once in last two proceeding cycles.
27 Section 2(f) of the UGC Act, 1956 defines “University” to mean a University established or incorporated by or under a Central Act, a Provincial Act or a State Act, and includes any such institution as may, in consultation with the University concerned, be recognised by the Commission in accordance with the regulations made in this behalf under the UGC Act
28 Section 3 of the UGC Act defines “Institutions Deemed to be Universities” to mean “The Central Government may, on the advice of the Commission, declare by notification in the Official Gazette, that any institution for higher education, other than a University, shall be deemed to be a University for the purposes of the UGC Act, and on such a declaration being made, all the provisions of this Act shall apply to such institution as if it were a University within the meaning of clause (f) of section 2.”
29 Regulation 3(B)(b)(ii) of the ODL and Online Education Regulations.
30 In Goa, private coaching classes and tuitions are regulated under the Goa Coaching Classes (Regulation) Act, 2001. Maharashtra has taken steps towards regulation of coaching classes however, no law has been enacted in this regard till date. See https://timesofindia.indiatimes.com/home/education/news/maharashtra-to-revise-draft-of-private-coaching-classes-regulatory-bill/articleshow/66703586.cms (last visited on December 29, 2020).
31 The list herein is not meant to be exhaustive.
32 Finance Act, 2020
33 Notification 8/2017 - Integrated Tax (Rate), available at https://cbic-gst.gov.in/pdf/integrated-tax/IGST_8_2017.pdf (last visited on December 29, 2020).
34 Subject to exemptions available depending upon the satisfaction of conditions laid.
35 ‘E-Commerce Operator’ has been defined as: ‘a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.
36 See https://www.livemint.com/news/india/more-than-50-of-india-s-population-25-yrs-or-older-survey-11593793054491.html (last visited on December 29, 2020).