Rapidly Emerging Sector & Legal and Regulatory Developments in India

Despite the current economic scenario, the foreign interest continues undeterred in the Indian education sector.  It is estimated that the Indian education sector itself will require further investment of approximately USD 100 billion by 2014 (1) to meet the demands of the economy.

In the first quarter of 2011, the Indian education sector has witnessed 11 private equity investments worth a combined USD 130 million, putting it on track to surpass the last year's USD 261 million raised from 25 deals (2).

Approximately 150,000 students travel to foreign countries every year and spend about USD 13 billion on education, which takes the market size to USD 86.2 billion (3).  The Government of India (GOI) currently spends 4% of Gross Domestic Product (GDP) on education, which is proposed to be increased to 6% in the 11^th five year plan.  This essentially translates into a proposed spend of INR 2,700 billion in the 11^th five year plan as compared to INR 435 billion in the 10^th five year plan (4). 

The overall education sector broadly comprises of (a) regulated sector- K-12 school (kindergarten where a child is enrolled at the age of 3 years and continues for 2 years plus 12 years of schooling), higher education college (bachelors degree, master/post-graduate diploma courses) and technical education college (engineering, architecture, hotel management etc.) and (b) unregulated sector – pre-school, vocational education and coaching institutes.

The regulated sectors namely K-12 school education comes under the purview of either Central Board of Secondary Education or Council for the Indian School Certificate Examinations or various state boards constituted under various state acts/regulations.  The higher and technical education colleges are governed by the University Grants Commission and All India Council for Technical Education respectively.  For the regulated sectors, to be a recognized educational institution, the affiliation or accreditation rules/ bye laws need to be complied with failing which the it can be classified as a ‘fake institution’ i.e. the conferral of degree has no legal sanctity for academic or employment purposes.  Amongst the host of regulations/affiliation bye laws prescribed by the abovementioned authorities is that a school or college may be incorporated either as a (i) trust under the Registration Act, 1908 or (ii) society under the Societies Registration Act, 1860 or (iii) ‘not for profit’ company under Section 25 of the Companies Act, 1956.

Additionally, foreign universities/institutions imparting technical education in India are now regulated by the All India Council for Technical Educational Regulations for Entry and Operations of Foreign Universities in India Imparting Technical Education, 2005 (“FTR”).  The FTR is applicable to foreign universities/institutions which are desirous of imparting technical education in India leading to award of diplomas, degrees, etc. and for facilitating collaborations and partnerships between Indian and foreign universities/institutions.(5)

The unregulated sector on the other hand have also attracted attention of foreign investors in various segments such as pre-school education, vocational, corporate training, and tutoring and test preparing services.  The GOI has been encouraging both private and foreign participation through private entities and PPP’s and has also announced incentives (including financial assistance) for running ITIs, with a target to add 1,000 polytechnics in government/PPP model by 2012(6).

The FDI policy(7), which came into effect from April 1, 2011, does not permit foreign investments in trusts (other than trusts which are in the form of a venture capital fund) and societies.  A ‘not for profit’ company may receive FDI, however, they are restrained by the very factum of its incorporation from applying its profits or other income towards the payment of dividend or other forms of profit distribution to its members.

Hence, though this sector has been opened up for foreign investments, the local laws, which regulate the nature of entities which are permitted to carry this education business, tend to restrict direct inflow of foreign capital in such entities.  However, this has not dampened the ever growing interest of the foreign investors in this sector and India has seen investors exploring newer and innovative structures for making investments including investments in the education services companies.

In addition to the growth in education sector, there have been several legal/regulatory developments that have taken place simultaneously during this year.  In a nutshell, they are as follows:

(a) FDI in LLP’s

In terms of the FDI policy dated May 20, 2011 (which became effective from April 1, 2011), the GOI has permitted FDI in LLPs’ with prior GOI approval, only in sectors where 100% FDI is allowed under the automatic route (other than to foreign institutional investors and foreign venture capital investors), and where no FDI-linked performance related conditions are applicable, subject to certain conditions on borrowings and downstream investments.  LLP being a hybrid entity incorporating the features of a body corporate and a partnership and offers several advantages as compared to the traditional public/private company.  Foreign investors can now consider investing in India in terms of structuring of investment taking advantage of the hybrid structure.

(b) E-meetings in general meetings and board meetings

The Ministry of Corporate Affairs has, by its circular dated May 20, 2011 has permitted shareholders and directors of Indian companies to participate in general meetings board meetings, respectively, by means of videoconferencing facility.  Earlier, a physical board and shareholders meeting were required to be physically convened under the Companies Act, 1956.  The quorum requirements for a shareholders meeting will not be counted if a shareholder is attending the meeting via videoconferencing. However, the presence of a director participating in a board meeting through videoconferencing will be counted for the purposes of quorum.  Every director is required to personally attend at least one board meeting every financial year.  These changes are welcome and are expected to provide relief to foreign shareholders having nominee directors on boards of Indian companies, who until now had to either travel to India or appoint an alternate director for a meeting of the board or a representative for a shareholders meeting.

(c) Foreign Arbitration

In the case of Videocon Industries Limited v. Union of India(8), the Supreme Court of India (SC) ruled that where an arbitration agreement was agreed to be governed by foreign law, such agreement operates as an implied exclusion of the provisions  of Arbitration and Conciliation Act, 1996 (Arbitration Act) relating to domestic arbitration.  In this case, the agreement between the parties specified that the governing law of the contract would be Indian lawand English law would govern the arbitration agreement and an overseas venue would be the seat of arbitration.  Union of India filed an application for interim relief before Indian courts, seeking a stay on the arbitral proceedings. Videocon challenged the maintainability of the application on the ground that Part I of the Arbitration Act was excluded. SC held that the agreement of the parties that English law would be the governing law of the arbitration agreement, would operate as an implied exclusion of the provisions of Part I of the Arbitration Act and as a result, the interim relief application was not maintainable.  This ruling illustrates a trend towards limited judicial interference in arbitral proceedings, as is envisaged under the provisions of the Arbitration Act and is a welcome development.

Yogesh Bhattarai is currently a Partner at AZB & Partners, one of most the prominent Indian Law Firms. He earned his B.A., LL.B (Hons) from the National Law School of India University, Bangalore in 1997. The focal areas of his practice are venture capital and private equity funds investments, joint ventures, mergers and acquisition. He has extensive experience in the education space, specifically, private equity investments in the ancillary education space. Further, he also has significant experience in financial services sector, particularly in the mutual funds industry . He has also got significant experience in the automotive space and advises large automobile manufacturers on joint ventures, cross border acquisitions.  Mr. Bhattarai can be contacted on +91 22 6639 6880 or by email at Yogesh.bhattarai@azbpartners.com