Understanding the Legal Dimensions in Indian Education for Entrepreneurs

Understanding the Legal Dimensions in Indian

Education for

Entrepreneurs

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Regulated/Formal Sector – K12 Segment and Higher Education

Unregulated/Non-Formal Sector – Pre-School, Vocational Education, Tutorial Classes, Test Prep and Multimedia Services

Indian Education Sector

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K12 Segment

Higher Education

Pre-School Segment

Vocational Education

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Regulated sector Largest segment in the Indian education

sector Expected to grow to USD 30 billion by 2012 Run as ‘not-for-profit’ ventures

Key Highlights

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NOC/Recognition from State Education Department

Requires affiliation & approval of curriculum/syllabus from education boards viz. CBSE, ICSE, IB, SSC and HSC

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FAQs

Entities Permitted to Set-up and Operate Schools Only ‘not-for-profit’ entities, i.e. a society,

public charitable trust and section 25 company As permitted by the State education laws

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Governing Laws Societies: Societies Registration Act, 1860 Public Charitable Trusts: Trust registered under

Indian Registration Act, 1908 Section 25 Companies: Companies Act, 1956

States Requiring Registration under the Public Trust Laws Maharashtra, Rajasthan, Andhra Pradesh,

Madhya Pradesh, Chhattisgarh, etc.

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Preferred Entity for entering the K12 Segment Trust

o unregulated entity in most States o lesser regulatory complianceso lesser transparency

Section 25 Company o entitled to benefits of incorporation and privileges of

limited liability o requires statutory compliances and filingso offers transparency

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Establishing Education Ventures through a Single or Multiple ‘Not-for-Profit’ Entity(s)

Size and scalability Divestment and exit options

Minimum Infrastructure Requirements Land area – 1 to 2 acres (1/2 to 1 acre in

metropolitan cities) Minimum 30 years lease or Government lease

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Effect of Right of Children to Free and Compulsory Education Act, 2009 (“RTE Act”) Elementary education a fundamental right No capitation fee

All existing schools to seek recognition Compulsory admission to children belonging to

weaker sections to the extent of 25% of the strength of the class

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Is FDI permitted in Education Sector 100% under automatic route Specifically prohibited in trust and society FDI permitted in section 25 company but

prohibition on declaring dividends Investment in education infrastructure

companies permitted - exemptions from minimum capitalization and land area requirements

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Possibility of PE Investment in K12 Segment Allowed only in related entities providing

services

Outsourcing of Services Allowed Services may be outsourced to related/third

parties

Is Sale of CBSE Affiliated School as an Undertaking Permitted No, CBSE bye-laws specifically prohibit

transfer or sale of school

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Policy on Fee Fixation in Private Unaided Schools and Treatment of Profits No policy for fee fixation As per Supreme Court fees charged to be

reasonable and commensurate to facilities provided

Profits to be utilized for the running and development of the school itself

Profits not to be diverted to any individual(s) Capitation fee/voluntary donations prohibited Collection of fees in the name of the school

and not the trust/society

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Existing Business Models in K12 Segment, for Entrepreneurs Greenfield projects/taking over existing

schools Joint ventures with real estate developers Management services to existing schools Franchising of the brand name

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Higher Education

Pre-School Segment

K12 Segment

Vocational Education

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Regulated sector Comprises of under-graduate, post-graduate

degrees and pre-doctoral and doctoral programs

Gross enrolment ratio – 12.4% expected to rise up to 30% by 2020

Higher education institutions have to be run as ‘not-for-profit’ ventures Profits to be infused back into the institute No distribution of profits

Key Highlights

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Regulated by Ministry of Human Resource Development through: At the central level, by University Grants

Commission Technical, legal, medical education is

regulated by :o All India Council of Technical Education

(“AICTE”), o Bar Council of India (“BCI”), o Medical Council of India (“MCI”), etc.

State Governments through private university regulations

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Minimum Land Requirements Private University – requirements are state

specific Haryana – 10 or 20 acres, depending on the

location Himachal Pradesh – 12.5 acres (approx.)

Leasing of Land (State Specific) Haryana – lease may be permissible Himachal Pradesh – Government lease of

minimum 30 years duration

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Stand Alone Colleges affiliated to University

Ownership and possession of minimum 2 acres of land if located in metropolitan cities or

5 acres if located in other areas

AICTE Institutes 0.5 acres to 10 acres of a continuous block of

land Ownership of land or irrevocable Government

lease for a minimum duration of 30 years.

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FAQs State Government Approvals to Set-up a

Private University Upon fulfilment of minimum eligibility criteria

including land requirements Permission to Section 25 companies to set up

private universities State Government constituted committee

considers proposal and submits report to Government

Issues letter of intent

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Can a University offer Technical Education and does it need approval from both UGC and AICTE? A University may offer technical education Simultaneously governed by UGC and AICTE UGC approval required and compliance with

higher of the norms laid down by UGC and AICTE

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Permissibility of Teaching Curriculum of a Foreign Institution in Technical Institutions. What kind of Degree/Qualifications are Students of such Institutions entitled to? Requires AICTE approval The curriculum and nomenclature of the

course/ degree to be picked up “as is” from the foreign university/institute

Minimum one semester in the country where it is set up

Degree in the name of the foreign university/institute

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Taxability of Services provided by Educational Institutions Eligible for tax exemptions under the Income

Tax Act, 1961 Services provided are Taxable under the head

of “Commercial Training and Coaching Centers”, however, they are exempt from Service Tax with certain conditions.

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Is Legal Regime’s Migration to a ‘For-Profit’ Structure a Possibility Government presently evaluating the

recommendation for allowing education sector to be operated as ‘for-profit’ venture under the 12th five year plan

Can the Institution Affiliate One Course to One University and Another Course to Another University The institution to be affiliated as a whole with

a university

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Latest Business Models in Higher Education Private University:

o State Government approval (constituted by state enactment)

o Minimum 2 years gestation period

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Collaboration Model: Foreign education providers partnering with Indian education institutions:o Introduction of curriculum of foreign

universities in the Indian institutionso Prior approval by foreign university from AICTE

Setting up Education Services Companieso Offer management and other services to ‘not-

for-profit’ entities running the institution

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Pre-School Segment

K12 Segment

Higher Education

Vocational Education

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Unregulated sector Expected to be a billion dollar market by 2012 Valued at USD 300 million in 2008 and is

expected to grow at an annual rate of 36% Considerable PE investment No affiliation or accreditation May be run as ‘for-profit’ ventures

Key Highlights

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Approvals Required for Setting up a Pre-School No sector specific approvals Set-up by ‘for profit’ entity General registrations including Income Tax

Registrations (PAN, TAN) Labour law registrations

FAQs

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Latest Business Model for Operating a Pre-School Franchise Model under brand license and know

how arrangements Partnerships/Collaboration with large investors

geographic expansion and scaling up to K12 segment

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Vocational Education

Pre-School Segment

K12 Segment

Higher Education

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India has target of creating 500 million skilled workers by 2022

Unregulated Segment Includes coaching and test preparation

courses/ classes, vocational and skill training education, multimedia content, curriculum, books, etc.

Other than ITI/Polytechnics, vocational institutions are unregulated.

Key Highlights

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Can be operated on a ‘for-profit’ basis No Restrictions concerning curriculum, fees

charged, minimum land, etc. Can be operated with or without Government

accreditation (National Assessment and Accreditation Council, National Board of Accreditation etc.)

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Latest Business Models in Vocational Education Public Private Partnerships (“PPPs”):

Government has been encouraging PPP Modelso Information and communications technology

contracts from Governmento JV with NSDC to promote skill development

Franchising Model:o Typically with brand license

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FAQs Concerns when entering into a Public

Private Partnership Generally a combination of equity and debt

funding Disbursement of loan in tranches subject to

achievement of milestones Affirmative rights sought in the management

of the investee company

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Provisions to be included in a Franchise Agreement Franchisors Perspective:

o Protection of IP rightso Limitation on scope of license and know-how o Non-compete obligation

Franchisee’s Perspective: o Continuity of arrangemento Right to use brand name and technologies with

updates

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