Foreign investments in India's educational sector have been hampered by regulatory restrictions but the new Foreign Educational Institutions and other bills promise to change the landscape, explain M Dhruva & Partners partner Manthan Unadkat and senior associate Tanya Raghani.

Foreign investment in K-12 schools

Foreign direct investment (FDI) of up to 100 per cent is allowed under the automatic route in the Education Sector since 2002 vide Press Note 2 (2000 Series). However, investment into the education sector has not taken off due to prevailing regulations that require the entity setting up the school or college or a deemed university to be of a non-profit character i.e. a trust or a society or in some cases a Section 25 Company.

However, the automatic route is not available for foreign investment into a trust or a society. Moreover, any surplus funds generated in the process of running formal schools have to be ploughed back into the same school and no dividends can be distributed. This adversely impacts commercialisation of the sector.

Certain structures have emerged to overcome these difficulties. For instances, in certain cases, the company creates a trust (a not-for-profit body) that runs the educational institute and further creates a subsidiary that supplies educational services, infrastructure etc., to the trust in lieu of fees. The trust has teachers on the rolls and collect fees from students while the remaining services are outsourced.

Foreign investments are then made into companies providing these educational services, infrastructure, etc., to the trusts, societies or Section 25 Companies running the school. The scope of services provided by such companies includes management services, teacher training, curriculum designing, etc.

However, if the company providing infrastructure services (including construction related services) to the trusts / societies has foreign investment, the criteria (minimum capitalisation norms, minimum buildup area, lock-in period, etc.) set out in the consolidated FDI Policy effective from April 1, 2010, have to be complied with.

Many entities are also setting up schools in joint ventures with real estate developers. This allows quality schools to be setup within residential complexes which makes the properties more attractive and the corporate entities running the schools do not have to commit huge funds for acquiring land. However, such structures may be challenged.

Foreign investment in universities

All colleges offering higher education need to be affiliated to a university (in turn under the purview of the central regulatory body called UGC – University Grants Commission).

At present, the entry and operation of foreign universities/institutions imparting technical education in India is regulated by the All India Council for Technical Education Regulations for Entry and Operations of Foreign Universities in India Imparting Technical Education, 2005 (Foreign Universities Regulations). These regulations apply to foreign universities/institutions providing technical education in India and even facilitate collaborations between Indian and foreign universities /institutions.

However, a foreign university seeking to establish an educational institution in India has to do so by way of a registered trust or a society and franchises from foreign universities are not permitted.

Foreign Educational Institutions Regulation of Entry and Operations, (Maintenance of Quality and Prevention of Commercialization) Bill 2010

Central Government has on 15 March 2010 unanimously approved the Foreign Educational Institutions Regulation of Entry and Operations, (Maintenance of Quality and Prevention of Commercialization) Bill 2010 (the "Bill"). The Bill proposes to allow foreign education providers to set up campuses in India and offer degrees and diplomas to students. After much debate and discussions the bill was finally passed by the Union Cabinet.

The Bill needs to be ratified by parliament before it is instituted as law and has been tabled in the Lok Sabha on May 3, 2010. The Bill was referred to the Standing Committee on Human Resource Development, which is scheduled to submit its report shortly.

The proposed Bill has many clauses to check its potential misuse. It prescribes a time-bound format to grant approval to foreign educational institutions to set up campuses in India. They would be registered with the University Grants Commission (UGC) or any other regulatory body (which supercedes UGC), which will scrutinize proposals of aspiring institutions according to India's priorities.

A foreign university aspiring to set up a campus will also have to deposit Rs 50 crore as corpus fund and cannot take back the surplus generated from education activities here. Moreover, a foreign education provider shall, out of the income received from the corpus fund, utilise not more than 75 per cent of it for the development of its institutions in India.

The remaining income will be deposited in the corpus fund. The Bill states that a foreign institution "shall not impart education in India unless it is recognised and notified by the central government as a foreign education provider under the proposed legislation" and offers education in conformity with the standards laid down by the statutory authority, and of comparable quality.

Three more Bills tabled

The Education Minister Kapil Sibal has tabled four major Bills in the Lok Sabha on 3 May 2010. The Prohibition of Unfair Practices in Technical, Medical Educational Institutions and Universities Bill, the Education Tribunals Bill and the National Accreditation Regulatory Authority for Higher Educational Institutions Bill, besides the Foreign Educational Institutions (Regulation of Entry and Operations) Bill.

The Prohibition of Unfair Practices in Technical, Medical Educational Institutions and Universities Bill relates to malpractices and recommends a penalty for charging capitation fees, demanding donations, incompetent teaching faculty, withholding students' certificates.

The Educational Tribunals Bill will facilitate setting up of tribunals at the national, state and regional levels to settle disputes related to institutions at various levels. The Bill on regulatory authority proposes to set up regulatory bodies to monitor and conduct accreditation of higher education institutes in a transparent manner.

Manthan Unadkat is a partner and Tanya Raghani a senior associate at M Dhruva & Partners.