indian higher education - "why and how of participating in the sector for a foreign...

KPMG-Edge forum report

Indian Higher Education - The defining years

Why and how of participating in the sector for a foreign player

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© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Organisers

The Alliance for U.S. India Business (AUSIB) is a leading non-profit trade association that offers a pathway to help your business succeed in the United States and India. AUSIB

seeks to augment investment flows and trade between the U.S. and India and open new channels of communication between business and government leaders.

Alliance for U.S. India Business (AUSIB)

Mr. Sanjay Puri, Founder & President, AUSIB Chairman, USINPACwww.ausib.org

The State Legislative Leaders Foundation is a nonprofit, nonpartisan, independent national organization committed to providing specialized educational and enrichment

programs for the leaders of U.S. Established in 1972 SLLF communicates regularly with these men and women through attendance of their university-based

educational programs, newsletters, research, and a variety of other activities.

State Legislative Leaders Foundation (SLLF)

Mr. Steve Lakis, President (SLLF) www.sllf.org

Dr. D. Y. Patil Vidyapeeth, Pune, (popularly known as DPU) has been accredited by NAAC with ‘A’ Grade, is a leading Institution in the Indian Education System.

The university offers a spectrum of courses with a focus on providing high quality education. It is also known for its emphasis on the inculcation of values and on

fostering of spirit of intellectual enquiry.

Dr. D. Y. Patil Vidyapeeth, Pune (DPU)

Dr. P. D. Patil, Chancellor, Dr. D. Y. Patil Vidyapeeth, Punewww.dpu.edu.in

EDGE Forum has partnered with KPMG in India to produce this report.

EDGE Forum is a group of leading educational institutions from public and private sector committed to promoting highest standards of education, value systems and governance in the field of higher education. It will particularly address the questions of improving the quality of education in several dimensions like education governance, human resource management, cutting-edge technologies, holistic approach to education infrastructure and above all adoption of best practices. It serves as an analytical and authoritative source for policy recommendations on higher education.

One of the flagship activities of EDGE Forum is the annual conference which has emerged as an authoritative platform for the higher education sector to showcase the recent developments, discuss and deliberate on topical issues and explore partnerships and alliances with international and Indian counterparts.

The 5th edition of the annual conference is scheduled between 12 – 14 March 2012 at India Habitat Centre, New Delhi. The event consists of Conference, Workshops, Exhibition, Awards and networking events. The ‘Call for Session Proposals’ and Delegate Registration is now open. Block your dates! For more information please log on to www.edgeforum.in

Emerging Directions in Global Education



The Indian government has traditionally focused more on primary and secondary education vis-à-vis higher education1 which as a result reflects on the country’s poor gross enrollment ratio that stands at 12.4 percent2. In the next two decades, India or rather Indians will account for close to a third of the working age population in the world. Realizing the importance of educated manpower and the potential it has in helping the growth of economy, efforts are on improving higher education.

Education Minister Kapil Sibal is hopeful that by 2020 the GER would be 30 percent3 but it would remain a mere wishful thought if it is not followed by action. This would entail in the words of Sibal making available 1000 more universities and 50,000 more colleges to its 40-45 million college-ready students4. This is an uphill task for any government alone to achieve hence private partnership and foreign collaborations are the way forward. It is in this context that the Foreign Education Provides Bill, 2010 assumes importance and merits quick legislation to make it an Act.

It is in the national interest of the country that it gets institutions of repute to convert its demographic dividend into a boon. This is akin to entry of foreign players in Insurance and Technology or recently Retail. Though there are bound to be a few hiccups such as disruption with local Indian players (in these case universities) and we should equip and protect them. But this doesn’t mean we can shut our doors to these universities.

It is a mutually rewarding relationship for these universities as well. Developed countries – particularly the US, UK and other parts of Europe are going through a recessionary phase in education5 too – in a different sense. The share of their local students is consistently declining and many of them have realized that going global is critical for longevity. The recent economic recession has adversely impacted them in terms of the grants and endowments that they usually receive. This is

also forcing these universities to look at emerging economies like China and India for a more stable and self sustaining source of income. Hence, this could be the right time for us to woo these universities to India.

While the Foreign Education Providers Bill 2010 (FEB) is fundamentally in right direction and has created a lot of interest in universities looking at India, lack of clarity in requirements and whether the bill will ever become an act – have been dampeners. Foreign varsities are skeptical about the practical viability of setting up a campus in India. The Bill mandates that each university has to maintain a corpus of INR 50 crore and the profit that the varsity makes has to be ploughed back into their branch in India. Besides this they also feel that there is no clarity on taxation and regulations that would be crucial in setting up a branch in India. Given their current finances, these are not giving any comfort. Much also depends on their partner in India and there are examples of their predecessors – who had faced setbacks due to alliances with less serious players – who did not understand the ‘business’ of education.

A detailed and a section wise analysis of FEB – in terms of ownership and partner-related assurances, regulation, finances and repatriation for investment protection, curriculum ownership, operational compliances and a conducive environment to bring the best faculty – apart from creating a supportive Industry sector participation is the need of the hour. Equipped with this, India should approach those varsities – which cater to its requirement - and proactively get them to India.

Narayanan Ramaswamy Partner and Head – Education Sector KPMG in India

1 Education trends in perspective: analysis of the world education, UNESCO/OECD World Education Indicators Programme - 2005

2 www.education.nic.in/HigherEdu/Report-UGCDPR.pdf

3 http://articles.timesofindia.indiatimes.com/2011-04-27/jaipur/29478592_1_union-minister-new-campus-sibal

4 http://www.thehindubusinessline.com/industry-and-economy/article2537790.ece5 http://www.kpmg.com/IN/en/KBuzz/Kbuzz_Issue10.pdf

The sentence quoted is that of Mr.Narayanan Ramaswamy in the article “Foreign Education Bill: Why, What and What More?”

PREFACE



While the Foreign Education Providers Bill, 2010 will pave the way for foreign varsities to enter Indian shores, it is important to gauge the existing infrastructure and regulatory mechanisms

which prevail in the Indian higher education scenario.

Around 13 million students enrolled in India in 2008 making it the country with the third highest number of students behind USA and China yet when compared globally it falls behind with a

poor GER of 12.4 percent which is way beyond the global average of 26 percent. India hopes to achieve 30 percent GER by 2020 and with the middle income groups’ increasing propensity

to spend on education and the growth of private education providers could help India reach its goal.1

Investment is crucial to the growth of higher education in India but education is still a social subject and the government does not allow ‘for-profit’ institutions1 preventing investment in the

higher education space.

A complex regulatory structure and the challenges in higher education such as lack of faculty, ineffective accreditation system and low employability of graduates could prove detrimental to

the aspirations of foreign varsities hoping to establish themselves in India. While the Bill when it becomes an Act targets to improve the higher education scenario in India substantially, issues

such what type of entities these institutes would fall under, taxation and regulations is clouded in confusion.

But weighed against these challenges are equally strong cases of successful collaborations between foreign universities and Indian varsities such as Wharton Business School, University

of Pennsylvania’s tie up with Egon Zehnder International in Mumbai or Fuqua Business School, Duke University’s tie up with IIM Ahmedabad to offer Global Leaders Program in which seven

days of the 14-day program are offered in India and the remaining in Paris. 1

International models such as student exchange, twinning, research partnerships and distance learning could be explored by varsities looking to enter India. Besides this some critical success

factors such as location, local partners, choice of programs besides knowing the regulatory mechanism well which have helped the existing foreign education players will act as useful

pointers for foreign varsities keen on entering the Indian market.

EXECUTIVE SUMMARY

1 KPMG Analysis



EXECUTIVE SUMMARY


© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


Inspiring US educator Marva Collins once said, “The essence of teaching is to make learning contagious, to have one idea spark another.”1 In India, there is no dearth

of good ideas but somehow the spark to execute those ideas is missing—both in government and private sector alike. So far India’s education sector has benefitted

from the seeds sown in the post-independence era and afterwards, but the cracks are showing now, and they are widening.

Thanks to the country’s growing economy, India now needs a wide reservoir of educated and skilled workforce more than ever. But the country’s education sector has failed to

keep pace with changing times—both in terms of volume and quality. Though India figured among the top three countries in terms of number of people enrolling for higher

education, UNESCO’s figures suggest that in the past decade India has lagged many countries in terms of gross enrolment ratio—the ratio of population in the of 18-24 to the

population enrolled in higher education. In 2006, the National Knowledge Commission2 had proposed that India needs 1500 universities. In October this year, HRD minister Kapil

Sibal echoed this while addressing the maiden Indo-US Education Summit in Washington reiterated that the country needs 1,000 more universities and 50,000 more colleges to educate

its population which is going to be the youngest in the world.

Estimates show that within a decade India will have a far younger population than other large economies. According to the National Commission on Population, the median age in India will

be 29 as compared with 37 years for China and the U.S., 45 years for West Europe and 48 years for Japan.3

India currently has around 500 universities and 20,000 colleges4, clearly not enough to teach and skill its burgeoning youth—India’s much-talked-about demographic advantage.

The Foreign Educational Institutions (Regulation of Entry and Operations, Maintenance of Quality and Prevention of Commercialisation) Bill, approved the by the Union Cabinet in March 2010, that would

allow foreign education providers to set up campuses in India and offer degrees, could partly help overcome the lacunae.5 At the same time it will also open up opportunities for foreign players to set up

their branches.

INTRODUCTION

1 http://thinkexist.com/quotation/the_essence_of_teaching_is_to_make_learning/340676.html2 http://www.knowledgecommission.gov.in/downloads/recommendations/

HigherEducationNote.pdf

3 http://www.standardchartered.com/media-centre/press-releases/2011/documents/20112505/India%20Super-Cycle.pdf

4 www.ugc.ac.in/pub/report/12.pdf5 http://www.business-standard.com/india/storypage.php?autono=388740


© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


Higher education in India 01

Regulatory environment and challenges 05

Opportunities for Foreign varsities in India 11

Need to know: Foreign Investment Structures and Compliance Requirements 12

Critical success factors for Foreign Universities in India 18

Contents


The Indian higher education system is one of the largest in the world comprising of around 550 universities and 31,000 colleges.1 Enrollments in higher education have been growing at a steady rate of ~6.3 percent2 over the last decade to reach an estimated 14.62 million student3 enrollments in 2009-10.

Considering the growing demand for higher education, India will need about 50,000 colleges by 2020.4

With about 13 million students enrolled in higher education in 2008, India is the third largest country in terms of student enrollments globally behind China and USA respectively.5

Source: UNESCO Global Education Digest, 2010 Source: UNESCO Global Education Digest, 2010

Yet India compares poorly with other countries in terms of gross enrolment ratio (the ratio of population in the age group of 18-24 to the population enrolled in higher education).

RISE IN GROSS ENROLLMENTS RATIO

HIGHER EDUCATION IN INDIA

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1 http://educationworldonline.net/index.php/page-article-choice-more-id-26072 http://www.nistads.res.in/indiasnt2008/t1humanresources/t1hr1.htm 3 FICCI Report - Making the Indian higher education system future ready

4 http://www.thehindubusinessline.com/industry-and-economy/article2537790.ece5 http://www.usief.org.in/USPSummerSeminar/newsletter/Ma-April-2011/USIEF_UPDATES.htm


Source: KPMG Analysis

Recognizing the need to improve higher education in the country, the Indian government has set itself an ambitious target of 30 percent GER by 20206. Achieving this target would be a huge opportunity as well as a challenge, since achieving even 26 percent GER7, the global average for higher education, would entail doubling student enrollments in the country.

6 http://articles.timesofindia.indiatimes.com/2011-04-27/jaipur/29478592_1_union-minister-new-campus-sibal

7 UNESCO: Global Education Digest 2010


But what makes this target seem achievable is the increasing propensity to spend on higher education. In India, traditionally higher education is funded by the student’s family in private institutions; hence growing private spending due to rising prosperity has further boosted private higher education.

Despite the global slowdown in the recent past, the Indian economy saw a robust growth and is likely to continue growing at around 7-8 percent8 in the next five years. With accelerated economic growth, a rapid increase in the middle and higher income households is expected.

It is estimated that more than half of the population would come from such households by 2025. Additionally educational loans for students have become popular over the last decade. According to the Reserve Bank of India (RBI), education loans disbursed by banks have increased by 46.7 percent from INR125.6 billion in 2007-08 to INR184.25 billion9 in 2008-09.

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AFFORDABILITY AND WILLINGNESS TO SPEND ON HIGHER EDUCATION

At the same time, there is a large increase in government spending on higher education. As a mark of policy shift, there has been a nine-fold increase in government appropriations for higher education from USD 2 billion to USD 18 billion for the 2007-2012 Plan.10

Increased private and government spending is expected to drive the growth of both government and private institutions.

8 World Bank’s India Economic Update, 20119 http://www.financialexpress.com/news/study-loan-disbursal-of-psbs-shrinks-to-23/643992/010 Eleventh Five Year Plan



4

GROWTH OF PRIVATE EDUCATION PROVIDERS

The growth in higher education in the country over the last decade has been led by the private sector. The private segment currently accounts for more than a third of overall enrolment and about 80 percent of enrolments in professional and technical education.

Source: XIth Five Year Plan; AICTE and other Professional Councils of Education



REGULATORY ENVIRONMENT AND CHALLENGES

With such strong growth drivers, higher education in India is poised to grow rapidly. While this gives a lot of opportunities for investments by foreign universities and education players in higher education in India, the major challenges are regulations surrounding this sector. The regulatory hurdles coupled with restrictions on exit route are deterring players from investing in higher education space in India.

Education is one of the priority sectors and is still perceived to be a social subject. The government has not yet warmed up to the idea of ‘for profit’ institutions in the country. Commenting on such a possibility in the near future, HRD Minister Kapil Sibal recently said, “I don’t think it is the right time yet to let ‘for-profit’ institutions in higher education operate in the country. I am not saying such institutions would never be allowed in the future. But as of now, I can say the time is not right”.—Indian Express, October 20111

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1 http://www.indianexpress.com/news/Not-yet-time-to-allow--for-profit--institutions-in-higher-education--Sibal/857162/


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LEGAL ENTITIES ALLOWED IN HIGHER EDUCATION SECTOR

The education market in India is divided into two segments i.e. regulated segment and unregulated segment. The higher education space falls under regulated segment comprising of degree granting universities and colleges, which are governed by UGC, AICTE, specialized professional bodies and state specific regulations. The regulated segment operates under ‘not-for-profit’ model and entities allowed in this segment are trust, society or not-for-profit Company (i.e. section 25 companies under the Companies Act, 1956).

The unregulated segment comprises of vocational, coaching, test preparation, research, etc. and can freely operate under ‘for-profit’ model.

In terms of legal framework, trust and society are governed by state specific trust / society laws and section 25 companies are governed by the central law. Identifying a suitable ‘not-for-profit’ entity option depends upon higher education segment and analysis of other regulations and parameters (viz. governance, flexibility, etc.).

A typical illustration of ‘not-for-profit’ entities allowed in higher education is depicted in below chart:

Not-for-profit entities

Entities Type/Function Legislation

Trust For a person who wants to set apart a property / funds for a charitable purpose

Governed by State specific Laws

Society Formed by several individuals coming together for setting up non-profit entity in a democratic environment

Governed by Central and State specific laws

Section 25 company To create non-profit concern adjunct to its main business activity

Governed by a Central Law



The Foreign Educational Institution Bill, 2010 (FEB) is being touted as landmark legislation as far as Indian education system is concerned. After having been unanimously cleared by the Union Cabinet in March 2010 and introduced in Parliament on May 3, 2010, it has now been referred to the Parliamentary Standing Committee for its comments and suggestions.

The Bill is aimed at regulating the entry and operation of foreign institutions which are imparting, or intend to impart, higher education in India. The Bill, if passed, would enable foreign universities to set up campuses in India and offer degrees.

The provisions of the Bill reflect the government’s focus on quality, reliability and accountability of foreign educational institutions or universities intending to establish in India. Further, FEB could be a milestone in India’s higher education which aims to achieve goals such as:

• Increasing Capacity

• Improving Quality –Challenging the current standards

• Strengthen Research

• Save foreign exchange outflow

Some of the salient features of FEB are:

• The Bill aims to regulate the entry, operation and maintenance of quality assurance and prevention of commercialisation by foreign educational institutions, besides protecting the interest of the student community from sub-standard and ‘fly by night’ operators.

• It requires foreign education providers to have operated in their home countries for at least 20 years.

• The institute will need to have adequate financial and other resources to deliver its courses, and to commit to maintain a corpus fund of at least INR 500 mn.

• Once foreign education providers have been approved, they must ensure that their programmes meet national standards and also the standards (of curriculum, delivery and teaching staff) of the main campus in their country of origin.

• The institute must also reinvest all surpluses in the growth and development of their Indian institutes (in other words, foreign providers cannot repatriate any surplus).

• If the foreign education provider violates any provision of the FEB or the UGC Act, 1956 or any other law for the time being in force or rules, regulations or orders made or notifications issued there under, it shall be liable to a penalty of INR 1 mn which could extend up to INR 5 mn.

Challenges in Implementation

While the Bill when it becomes an Act targets to improve the higher education scenario in India substantially, the issue of implementation is clouded in confusion.

For example – it is not clear what entity structure (i.e. trust, society, section 25 company) will be allowed to foreign educational institution for establishing operations in India. The second issue is how the corpus of INR 500 mn would be funded i.e. whether FIPB approval route would be followed or FCRA approval would be required.

Further, it appears from the Bill that the foreign education institutions would

also be subject to multiple regulations applicable to Indian universities and institutions like UGC, AICTE, MCI etc. Educational institutions in most countries, particularly in UK and USA, enjoy a high degree of autonomy and it is doubtful whether a reputed institution would agree to such a complex regulatory framework in India.

Also, it is doubtful that foreign institutions would be willing to put in a huge corpus of INR 500 mn with no hopes of repatriation or earning returns.

The policymakers would do well to address the abovementioned concerns and provide more clarity to create an amiable atmosphere to attract genuine foreign educational institutions.

Voices for and against the Bill

The Bill is being watched closely by educational institutions around the world and by supporters and critics alike in India. Supporters of the Bill believe that the entry of foreign institutions will improve the quality of education through competition, and that an increased number of institutions will increase access to education for a larger portion of the population besides saving a huge amount of foreign exchange that is drained out of the country with students going abroad to pursue higher education.

Detractors worry about foreign influence on the national identity as well as the potential for inadequate monitoring. The Bill has also met with opposition from some quarters of academia and lawmakers that insist that the passage of the Bill may harm the Indian universities and may result in an exodus of academicians and faculty from Indian universities and institutions due to comparatively better paying capacity of the foreign universities. The

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FOREIGN EDUCATIONAL INSTITUTION BILL AND ITS IMPLICATIONS


opposition has expressed the view that instead of inviting foreign universities in the country, the government should focus on and improve the existing Indian universities.

Having said the above, the Government would do well to address the concerns of the existing Indian educational institutions by improving the infrastructure and quality of education and at the same time creating an environment which is conducive to attracting the quality foreign education institutions to India to fill the ever increasing demand supply gap.

In the recently held India-US higher education summit in Washington, the HRD Minister Kapil Sibal stressed on the need to create greater higher education infrastructure in India and solicited American cooperation in this direction. Although the summit did generate interest amongst the American academic fraternity, the stand of our Government and the provisions of the FEB of not allowing profit repatriation may well act as a dampener in the India-US collaboration in higher education.

Despite the concerns raised by few quarters of academia and policymakers, the truth is that in the next two decades time, India or rather Indians, likely to account for close to one third of the working age population in the world.2 Faced with a severe shortage of quality educational institutions, it is in our national interest that we should get institutions of repute to convert the demographic dividend into boon.

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2 KPMG Analysis



Besides regulatory challenges, as Indian higher education grows rapidly, it faces several challenges in terms of:

• Lack of faculty

• Ineffective accreditation system

• Low employability of graduates

While the number of Indian higher education institutions has grown rapidly over the last decade, the quality of such institutions has not been able to keep up with the pace. One of the major problems plaguing India education is non-availability of faculty.

While there exist various bodies for maintaining standards of higher education in India such as NAAC, AICTE and MCI in practice – accreditation process has not been effectively implemented.

This is reflected in poor performance of Indian higher education institutes in global rankings

Source: THE - Rankings 2011

CHALLENGES IN HIGHER EDUCATION

LACK OF FACULTY

INEFFECTIVE ACCREDITATION SYSTEM

For some of the professional education streams like Medicine and Engineering the faculty is not adequate even in existing universities and institutions, thus spreading them too thin across the institutes. This has also impacted the quantity and quality of research work carried out in the institutes.

9


Universities and colleges are churning out growing numbers of unemployable graduates without preparing them for the workplace. As a result, the unemployment rate of graduates

is increasing twice as fast as the enrolment growth. Studies have shown that less than 10 percent of fresh graduates are employable in the industry.

Source: Media reports, Purple leap study

Study was conducted in 2009

Report: Employability skills among Engineering Students

LOW EMPLOYABILITY OF GRADUATES

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OPPORTUNITIES FOR FOREIGN VARSITIES IN INDIA

In spite of all the challenges, India is emerging as a significantly important marketplace in the new global order and several international education institutions are strengthening their relationship with India. Such educational presence in India has immensely

benefited the international education institutions as much as it has benefitted the Indian economy. Programs offered by internationally renowned education institutions have contributed to the educational advancement of senior level executives from India, who are

keen, and understand their place in the global environment. The educational institutions, in return, have expanded their own knowledge base through research, relationship with business leaders in India.

Trends in collaboration1

Global educational institutions are predominantly opting for a partnership model with leading Indian education institutions while few others choose to operate directly. The operating model consists of short –medium term courses which are offered either entirely in India or partially in India and partially in the collaborating global universities. With leading business houses in India, willing to invest in training their mid and senior management employees, such models are gaining acceptance in India at a faster pace.

• Harvard Business School is the pioneer of direct operation in India through its Harvard India Research

Center and offers seven Executive Education Programs of which four are new entrants in 2012 portfolio.

• Wharton Business School, University of Pennsylvania, has tied up with Egon Zehnder International to offer courses in India’s financial hub, Mumbai. They have also tied up with Indian FMCG major, ITC Limited to offer function specific training programs for their senior executives.

• Fuqua Business School, Duke University has tied up with IIM Ahmedabad to offer Global Leaders Program in which seven days of the 14-day program are offered in India and the remaining in Paris.

• Another interesting trend of global education in India is the formation of a consortium among multiple international education institutions and offering courses of which one module is delivered in India. Lancaster University, UK, McGill University, Canada, INSEAD, France, Consortium of Japanese Schools, KDI School of Public Policy and Management have tied up with IIM Bangalore to offer International Masters Program in Practicing Management.

The following sections will illustrate the Internationalization Models followed by foreign universities globally.

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1 KPMG Analysis



NEED TO KNOWForeign Investment Structures and Compliance Requirements

Having discussed various models and the opportunities in store for the foreign universities in India, let us focus on the various ways of foreign investment, taxation issues and the regulatory bodies manning higher education in India.

Foreign investments in India are governed by Foreign Direct Investment (‘FDI’) policy and related rules and regulations. The FDI policy in India is formulated by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. In formulating FDI policy for various sectors, the guidelines issued by other ministries are also taken into account.

The objective of FDI policy issued by the government is to invite and encourage foreign investment in India. Since 1991, the guidelines and the regulatory process have been substantially liberalized to facilitate foreign investments in India.

The foreign investment in most sectors is now under the automatic route i.e. the non-residents can invest into sectors under automatic route without any prior approval from the regulatory authority. Presently, foreign investment up to 100 percent is allowed under automatic route in the education sector.1

Despite such relaxation, foreign investment into education sector has been predominantly restrictive due to the requirement of ‘not-for-profit’ entities in the regulated higher education space. While, foreign investment can be made in Indian companies and partnership firms, it is specifically prohibited in trust and society. Even though foreign investment can be made in section 25 company, it is not an attractive proposition due to charitable nature and inability to distribute returns on investments by section 25 company.

In terms of education infrastructure, the government took a positive step recently by allowing foreign investments in education construction companies with certain exemptions. The waivers include not having to comply with stringent construction-related conditions of minimum development criteria, minimum capitalization and investments lock-in among others. Amid the current regulatory environment, liberalization of foreign investment norms in education infrastructure is a welcome move by the government which will not only help boost investment in education infrastructure but also the confidence of investors and real estate players in education sector.

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1 Consolidated FDI Policy 2011


Considering the regulatory bottlenecks for foreign investment in formal regulated higher education sector, alternative structures are being explored. Depending upon the commercials, education service companies are being set-up to render management and infrastructure services to ‘not-for-profit’ entities running degree courses.

The foreign investment in education service companies is allowed under the automatic route of FDI policy. Such structures facilitate payment of management fees to ‘for-profit’ entity as a consideration for services provided to trusts or societies or section 25 companies.

However, the transactions between ‘for-profit’ and ‘not-for-profit’ entities are required to be conducted at arm’s length with proper documentation authorization from respective governing councils. Such structures, in principle, are in conformity with the rules and regulations but are untested and carry a certain element of risk.

Under the higher education regulations, the core infrastructure assets are required to be owned by not-for-profit entities. Since foreign investment is not permitted in trusts and societies, the funding in these entities to create requisite infrastructure base needs to be by way of donations.

These not-for-profit entities can avail foreign donations (i.e. foreign contribution) under the approval route as laid down in Foreign Contribution (Regulation) Act, 2010 (‘FCRA’). FCRA provisions allow either ‘one-time registration’ which entitles receipt of

donations for continuous period of five years or specific ‘prior permission’ can be obtained for each tranche of foreign donations, subject to satisfaction of other conditions.

FCRA regulates the acceptance of foreign donations and prohibit the acceptance and utilization of the same if the activities carried out are detrimental to national interest. One needs to ensure proper compliance of FCRA to avoid any penal consequences, especially, considering the rationale for enactment of FCRA.

At this juncture, it is useful to highlight the current ambiguity in making equity investment in section 25 company. While equity investment is allowed in section 25 companies under the FDI, the controversy is whether the FCRA provisions also apply to such investments? In other words, does equity investment fall under the wide definition of ‘foreign contribution’ under the FCRA? Other similar ambiguities need to be deliberated and considered where foreign donations are involved.

Education, being one of the elements of ‘charitable purpose’ as defined under the present domestic tax laws, the not-for-profit entities in education sector enjoy tax exemption in India. The donors enjoy 50 percent deduction of the donations subject to fulfillment of conditions.

In case of education service companies, the profits earned are subject to normal corporate tax rate as applicable (currently, 30 percent plus surcharge and education cess).

Some of the key challenges to be met in continuing to enjoy tax exemption status by not-for-profit entities are as under:

• Meaning of ‘charitable purpose’ and incidental activities covered within its ambit

• Nature of expenditure covered within the expression ‘application of income’

• Maintaining independence between ‘for-profit’ and ‘not-for-profit’ entities and determination of arm’s length price for transactions amongst them

• Restrictions in utilizing surplus funds at the not-for-profit entity level

In foreign collaboration models, the payments received by the foreign university from Indian partner institution for providing services, access to course materials and curriculum, brand name, etc. are generally characterized as royalty or fees for technical services in the hands of the foreign university or institution. This imposes an obligation on the Indian partner institution making the payment to withhold the taxes from such payment. Presently, royalty and fees for technical services are liable

for tax withholding at 10 percent (plus applicable surcharge and education cess) or lower rate, if specified, under the relevant Double Tax Avoidance Agreement.

The government has proposed new direct tax law [i.e. Proposed Direct Taxes Code Bill, 2010(‘DTC’)], which once enacted, will replace more than five decade old existing domestic tax law [i.e. Income-tax Act, 1961 (‘IT Act’)].

While most of provisions of DTC are similar to IT Act, some of the provisions proposed will have far reaching implications in the context of tax exemption enjoyed by not-for-profit entities. For instance, non-profit organizations (‘NPO’) carrying on business not incidental to charitable activity will be disqualified, related party transaction not at arm’s length disqualifies NPO from claiming NPO status, etc. under the proposed DTC.

ALTERNATIVE INVESTMENT STRUCTURE

FOREIGN DONATIONS

TAXATION ASPECTS

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An important decision that goes along with investments into India by Foreign Schools / Universities is regarding the Foreign Teachers. Foreign Teachers are either hired directly by the School / University set up in India or at times, deputed from foreign schools into India.

In either of the cases, it is important to be aware of the tax and regulatory requirements in India. The Foreign Teachers coming into India specifically for teaching assignments, would primarily need to arrive on an employment visa. On arrival, registrations with the Indian Revenue Authorities and the Foreign Regional Registration Officer would need to be completed within the prescribed time lines.

The Foreign Teachers will be taxable in India (as they would be rendering services in India). It is important to note that such Foreign Teachers are at times eligible to claim benefits under the Double Taxation Avoidance Agreements (DTAA) that India may have with different Countries. For instance, the DTAA between India and United States of America (USA) inter alia provides

a tax exemption to an individual who visits India for a period not exceeding two years for the purpose of teaching or engaging in research at a university, college or other recognized educational institution in India, and who immediately before the visit was a resident of USA (subject to prescribed conditions).

In case of Foreign Teachers having a taxable salary in India, the Indian entity (receiving the expatriates), for this purpose, would be liable to withhold taxes at source and have these deposited into the Government Treasury. The Indian entity will also be responsible for completing other compliance requirements viz. filing quarterly withholding tax returns and issuing Salary Certificates. The Foreign Teachers, would be responsible for filing their personal tax returns on an annual basis disclosing, as applicable, their remuneration and tax OR the exemption so claimed (as illustrated above).

In addition to the above, the Foreign Teachers (working in or in connection with the Indian Entity) would liable to contribute to the Indian Provident Fund (Indian Social Security). The Indian

Entity would be liable to make matching contributions. These contributions would be subject to the provisions of the Social Security Agreement (SSA) that India may have with the home location of the Foreign Teacher. For instance, in case a Foreign Teacher continues Social Security contributions in Belgium and the Foreign Teacher can obtain a Certificate of Coverage from the Belgian Social Security Authorities, he need not contribute to the Indian Provident Fund. In the absence of a SSA, the Foreign Teachers are eligible to withdraw the aggregate contributions after completion of their Indian assignment and on attaining the age of 58 years.

Separately, Foreign Teachers may be eligible to receive remuneration outside India (subject to conditions). Alternately, where they receive remuneration in India, they are permitted to remit the entire salary (after payment of statutory dues, viz. tax, provident fund, etc.) into their foreign bank account (for maintenance of close relatives outside India).

FOREIGN TEACHERS (TAX AND REGULATORY REQUIREMENTS)

Research Activities

In the recent past, a lot of interest has been generated on research projects by foreign universities. The research activity, being unregulated, can be carried out by not-for-profit as well as

for-profit entities. The research activities carried out by not-for-profit entity is tax exempt. Further, the present tax laws provide additional (weighted) tax incentives for donors giving donations to

not-for-profit entities and for-profit entity (up to limited extent) for carrying out specified research activities.

A comparative snapshot of tax incentives available to donors for giving donations for research activities under the present domestic tax laws and proposed tax code:

Present tax law

Donors Type of research activityWeighted tax

deduction

Not-for-profit For-profit

Donors having business income

Scientific research 175% 125%

Research in social science or statistical research

125% -

Other donors Scientific research, research in social science or statistical research

100% -

Proposed tax law

Donors Type of research activityWeighted tax

deduction

Not-for-profit For-profit

All donors Scientific research 175% -

All donors Research in social science or statistical research

100% -

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Higher education typically comprises under-graduate, post graduate degrees and pre-doctoral and doctoral programs. This sector can be further classified as technical and non-technical education. While, the UGC is an umbrella regulation which governs any institution imparting degree, the institution carrying out technical education also needs to comply with operational norms specified under AICTE (for engineering, management studies etc.) and MCI (for medical) among others.

Education, being a subject of Union list, State list as well as Concurrent list, multiple bodies across central and state levels govern higher education sector. This results into a complex regulatory system with overlapping mandates amongst regulators.

REGULATORY BODIES GOVERNING HIGHER EDUCATION

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Challenges faced by British business in India | 16

University Grants Commission:

UGC is set up under the University Grants Commission Act, 1956. UGC prescribes the minimum standards to be adhered to by universities and colleges affiliated to such universities. The salient features of UGC are as under:

• Promotion / coordination of university education.

• Determination / regulation of standards of teaching, examination and research in universities.

• Prescribing regulations for minimum standards of education.

• Advising central / state governments on improvements in university education.

• Disbursement of grants to universities.

AICTE :

AICTE is a statutory body established under the aegis of All India Council for Technical Education Act, 1987 for regulation of technical education in India. AICTE governs technical education imparting institutions which currently include institutions imparting education, research and training in Engineering & Technology, MCA, Pharmacy, Architecture & Town Planning, Applied Arts and Crafts, Hotel Management & Catering Technology and Management.

The prime objectives of AICTE are:

• Promotion of quality in technical education.

• Planning and coordinated development of technical education system.

• Providing regulations and minimum norms and standards to be maintained by the technical institutions.

AICTE has also prescribed norms for promoting collaborations or twinning programs between Indian and foreign universities in the field of education, research and training. It lays down conditions for determining eligibility and grant of approval to foreign universities imparting technical education through collaboration or twinning agreements. These include:

• Seeking necessary prior permission from AICTE;

• Foreign university to impart technical education only by means of collaborative or twinning agreement with AICTE approved Indian university, franchising not allowed;

• Accreditation of foreign university in parent country with acceptable grades where grading is available is mandatory;

• Degree / diploma from foreign university to have same nomenclature as exists in parent country

• No distinction in academic curriculum, mode of delivery, pattern of examination from that provided in home country, fees and student intake as per AICTE guidelines etc.

• Necessary accreditation by the National Board of Accreditation.

Apart from UGC and AICTE, there are other regulations (i.e. MCI, BCI, ICAR etc.) and state specific regulations that need to be complied with depending upon the higher education segment (i.e. medicine, law, agriculture, etc.) and the type of institutions (i.e. college/PU/DU) .

In order to address the issue of multiplicity of governing regulations having overlapping mandates amongst regulators, the Ministry of HRD constituted the ‘Committee to Advise on Renovation and Rejuvenation of Higher Education’ (popularly known as ‘Yashpal Committee’). The committee has proposed a much awaited structural revamping of higher education regulations in recommending constitution of National Commission for Higher Education and Research (NCHER), to simplify the overall regulatory environment. NCHER is proposed to serve as the apex regulatory body undertaking the consolidated responsibilities of UGC, AICTE, BCI, MCI, and other regulatory bodies.

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CRITICAL SUCCESS FACTORS FOR FOREIGN UNIVERSITIES IN INDIA

While Foreign Universities operating in India are limited both in terms of number of institutions and their scale of operations, there have been a few players who have established themselves in the Indian market offering a range of services. In the following section we have tried to understand the contributory factors for their success in India. Some of the critical success factors for institutes looking to enter India are:

The case studies illustrated below showcase the collaborations between foreign and Indian universities:

University of Huddersfield-IHM Aurangabad1

• Started in 1989 University of Huddersfield-IHM Aurangabad collaboration is among successful tie-ups between foreign and local institutes.

• Collaboration is one among the only two that have actually obtained AICTE recognition along with Asia Pacific Institute of Information Technology (APIIT) in Haryana.

• Local partner IHMA is established in collaboration with India’s largest hotel chains-Taj Group making the programs industry relevant and providing placement assistance to students.

• Institute offers 4 year bachelor programs in hospitality and culinary arts which are among high demand programs in terms of manpower requirements for industry preparing students to take up managerial/chef roles in hotels.

• Students would undergo programs with University of Huddersfield curriculum to receive university degree upon successful completion of course.

• Students graduating from the institute are offered priority progression entry to a wide range of undergraduate and postgraduate courses at University of Huddersfield campus.

Key Learning’s

• Local partnerships and regulatory approvals

• Limited financial investment

• Adopting global standards for Indian programs

• Leverage partnership to attract Indian students to enroll in parent institute

Harvard Law-OP Jindal Global Law School1

• Partnership with non-profit organization-OP Jindal University in India to produce legal professional with global exposure.

CHOOSING RIGHT PARTNERS & COLLABORATION MODELS

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1 KPMG Analysis


• Harvard Law School provides eminent guest faculty, research and academic collaboration.

• Harvard also conducts joint conferences with other universities like Oxford distinguishing the learning experience in the institute in comparison with Indian counterparts.

• Local partner hosts Harvard students for internships.

Key Learning’s

• Local partnership


• Global exposure for its faculty and students

Schulich Business school-GMR2

• Collaboration initiative started in 2011 and is expected to commence operations by 2013.

• Schulich Business School has partnered with India’s leading infrastructure group-GMR with an agreement to land and the physical infrastructure for India campus.

• According to partnering agreement Schulich will develop the learning environment and academic infrastructure.

• Proposed institute would be a first full-fledged campus of an international business school in India.

• Institute is planned to house international faculty with global curriculum and world class infrastructure.

• Schulich will initially offer its two-year MBA program to 120 students at the Indian campus, along with Executive Education programs. Institute has further plans to launch other degree and non-degree programming, including an Executive MBA, Post-MBA Diploma in Advanced Management and Executive Education.

Key Learning’s




PDPU – Texas A&M University2

• Collaboration initiative started in August 2010 and is expected to commence operations by 2013.

• Texas A&M University has partnered with one of India’s leading petroleum universities-PDPU with an agreement to student exchange and partnership programs.

• According to partnering agreement Texas A&M University will develop the learning environment and academic infrastructure.

• Proposed programs intend to produce joint student research

projects in nuclear security engineering in addition to development of a Joint Nuclear Security Education program.

Key Learning’s




Penn State University - Indian Universities2

• Collaboration with Indian universities like Indian Institute of Technology (IIT) and Narsee Monjee Institute of Management Studies (NMIMS).

• The collaboration aims to expand their global research programs internationally.

• The collaboration plans to exchange students for a fixed term to give them global exposure.

• The universities also plan to offer joint programs to allow students to study at different locations and also to expand their global footprint.

Key Learning’s


• Global exposure for students

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2 KPMG Analysis


Adopting global standards for Indian programs to build a clear differentiator for attracting local students is crucial.

RUTGERS MINI MBA3

The Rutgers B-School’s Mini MBA is one of the leading product offerings aimed at young managers, chartered accountants, functional experts, entrepreneurs and other professionals transitioning to the management cadre in organizations. The courses are of short duration lasting about 10-12 sessions of 3 hours each with flexibility in terms of the mode of learning – online, in class and short courses. This suits the working professionals and enables them to pursue the course in parallel with their regular work schedule. The courses are treated at par with other university courses where in university credits are provided in addition to the certificate issued by the University. Each course is focused on a particular area of management and is delivered by the faculty of the Rutgers Business School. The courses can also be tailored to specific organizational needs.

The Mini-MBA has been launched in India and has been widely successful with professionals from many reputed organizations like Anil Dhirubhai Ambani Group, Mahindra & Mahindra, Essar Group, UTV Group, Bajaj Electricals, Eureka Forbes, Franklin Templeton, Thomson Reuters, Yes Bank, HDFC, Shapoorji Pallonji & Co and Sanofi-aventis among others, enrolling for the program. The success of the program could be summarized as follows:

• Costs much less than a full time MBA

• Short duration courses suits working professionals

• Focused on certain key areas, that can also be tailor made to specific organizational needs

• Provides university credits and is treated at par with university courses

• Provides flexibility in the mode of learning – online, in class and short courses

Key Learning’s

• Innovative program design

• Blended learning model

DUKE MBA—CROSS CONTINENT PROGRAM3

This program is designed to help full-time working individuals earn an MBA from one of the leading institutes while learning in culturally and economically diverse settings thereby enabling them to lead multi-national enterprises. The 16 month program involves eight weeks of immersed residential learning at Duke’s global campus network in China, India, Russia and the UAE. This facilitates an intense face-to-face interaction with the faculty and team of class mates. Each week of immersed residential learning is followed by seven to ten weeks of collaborative distance learning with a globally dispersed team. The residential learning also involves out of the class room assignments that helps the students gain understanding of region-specific institutions, markets, cultures, civilizations and how they shape the flow of international commerce. The teams are interchanged at mid-point of the program thereby enabling the students to build a larger network of peers throughout the academic experience. Some of the key highlights of the program are:

CHOOSING THE RIGHT PROGRAM OFFERING

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3 KPMG Analysis


• Ability to live and work anywhere in the world while studying in the most important economic regions of the world

• Exposure to diverse business environments across the world

• Access to a unique professional network – a range of diverse class mates, companies, industries and partners

Key Learning’s

• Innovative program design

• Global exposure for students

LANCASTER—GD GOENKA UNDERGRADUATE PROGRAM4

The GD Goenka World Institute (GDGWI) and Lancaster University have been in partnership since 2009 providing a range of programs at the GDGWI Campus at Gurgaon, near Delhi in India. This collaboration allows students of GDGWI to study for a series of highly valued Lancaster University degrees locally in India. The Lancaster University is ranked in the top 10 of UK universities and is one of the 1 percent of world business schools that are triple accredited. The programs are validated by Lancaster University and a Lancaster University degree is offered while the courses are delivered by GDGWI staff. The students would have access to

Lancaster teaching resources and library. In addition, GDGWI students are invited to attend two-weeks of summer school at Lancaster University to experience English culture and participate in a variety of out-of-class activities designed to help them develop a broad set of leadership and personal skills. Some of the key highlights of the program are:

• A different learning style as compared to other institutes in India

• Benefits of an established research reputation

• Industrial partnerships

Key Learning’s


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4 KPMG Analysis



CHOOSING THE RIGHT LOCATION

HAVING A ROBUST ENTITY STRUCTURE

Location is as important as choosing the right partner and program. Since education is a concurrent subject which implies that both states and the central government have the power to formulate regulations regarding education. Given below are two maps that show: i) which states have legislations, states which passed legislation recent, density of private universities and ii) traditional education clusters in India.

Apart from choosing the right local partner, program and location, foreign universities keen to operate in India should have robust entity structure. Planning ahead will help in identifying the potential issues and addressing the same in timely and effective manner, thereby reducing compliance and litigation costs in future. The critical factors for a robust entity structure in higher education from tax and regulatory perspective would be:

ORGANIZATIONAL FACTORS

• The constituents of entity structuring i.e. whether to have ‘for-profit entity’ or ‘not-for-profit entity’ or combination of both, depending upon objectives, nature of activities and location

• Selection of suitable ‘not-for-profit entity’ option (i.e. trust, society or section 25 company) and implications under each option, keeping in mind the commercial parameters

• Deciding on ‘single not-for-profit entity option’ or ‘multiple not-for-

profit entities option’ depending upon the scale of operations

• Selection of suitable ‘for-profit entity’ option which facilitates fund raising, future expansion, value capturing and exit strategy

• The structures flexible enough to adopt to proposed regulatory environment

• Arrangements under collaboration / twinning models between foreign universities / institutions and Indian institutions to foster partnerships in a regulatory compliant and tax efficient manner

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COMPLIANCE FACTORS

• Requisite approvals from regulatory authorities and functioning of the education institutions within the regulatory framework

• Requisite approvals from tax authorities and proper and timely compliance of all the approval conditionality for availing tax exemptions or tax incentives to eligible donor

• Aspects relating to ‘charitable purpose’, ‘application of income’ for charitable activities, investment conditionality of surplus funds available with ‘not-for-profit’ entity

• Determination of adequate arm’s length pricing for transactions amongst ‘for-profit’ and ‘not-for-profit’ entities

• Periodic and timely compliance of audit, tax return filing and other tax compliances, labor law requirements, etc.

Foreign Education Providers considering entry into India should consider a medium-long term outlook to evaluate opportunities. Traditional formal Higher education setup is capital intensive with clear regulations governing the land requirements/ ownership, minimum infrastructure requirements for obtaining necessary approvals for higher education setup. This coupled with the regulatory restrictions on pricing, scaling up operations resulting in longer gestation period that necessitates players to have a long-term strategy for the Indian market. While newer models are emerging (such as blended learning, joint-venture models in vocational aspects of higher education leveraging synergies of Global/ Indian players), they are still nascent and will require a careful evaluation.

MANAGING EXPECTATIONS

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LIST OF ABBREVIATIONS

HRD – Human Resource Development

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

GER – Gross Enrollment Ratio

GDP – Gross Domestic Product

RBI – Reserve Bank of India

UGC – University Grants Commission

AICTE – All India Council for Technical Education

MCI – Medical Council of India

FIPB – Foreign Investment Promotion Board

NAAC – National Assessment and Accreditation Council

NGO – Non-governmental Organization

PGP – Post Graduate Program

PGPMAX – Post Graduate Program in Management for Senior Executives

FDI – Foreign Direct Investment

FCRA – Foreign Contribution Regulation Act

NPO – Non-profit Organization

MBA – Masters in Business Administration

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This report has been prepared by KPMG in India to be released at the Indo-US Education Conclave 2011 on 5-7 December 2011 in Pune

Overall LeadershipValuable guidance was provided in preparing this report by Narayanan Ramaswamy and Hemal Zobalia from KPMG in India, Jagdish Patankar (M M Activ Scitech Communications) and Prof. Sridhar Chari.

Report CreationThis report would not have been possible without the commitment and contributions from Madhavan Vilvarayanallur, Pankaj Bagri, Ajay Bose, Gaurav Kumar, M Rajagopal, Joyeeta Ghosh, Priyanka Balasubramanian and Praveen Krishnan from KPMG in India.

This document has been designed by KPMG in India’s Brand and Design team.

Acknowledgment

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


The KPMG name, logo and “cutting through complexity“are registered trademarks of KPMG International.

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Indian Higher Education - The defining years

Why and how of participating in the sector for a foreign player

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Rajesh JainPartner and Head MarketsT: + 91 22 3090 2370 E: [email protected]

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