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Press Note 2 of 2005 which regulates FDI in real estate, in general, is no longer binding on the education sector. As per its norms, only a company developing a minimum of 500,000 sq. ft and having a minimum capitalisation of $10 million for a wholly-owned subsidiary ($5 million in the case of a joint venture) can invite FDI from an infrastructure company. These requirements made it virtually impossible for educational institutes to attract FDI to build their campuses.
"Even if a company wants to provide infrastructure services to an educational trust, the criteria (minimum capitalisation norms, minimum built-up area, lock-in period, etc., applicable to FDI in real estate) set out in the old FDI policy, restricted inflows into education," says Akshay Chudasama, partner at Jyoti Sagar Associates, a Mumbai-based law firm.
Coupled with the All India Council for Technical Education norms requiring B-schools and technical institutes to own at least half an acre of land in metros and five acres in the case of non-metros, the old FDI policy put paid to the expansion plans of these institutes.
In such a scenario, the amendment brings relief. "Earlier, FDI was available only to very large educational projects because of restrictions in terms of the total built-up area. Now, Press Note 2 removes such conditionalities and any school or college can avail FDI in infrastructure for the education sector," says P. V. Ramana, chairman of Mumbai-based ITM Group which runs B-schools and engineering colleges.
Even players in primary and secondary education will benefit. Says Atul Temurnikar, chairman and co-founder of Singapore-based Global Schools Foundation which runs six international K-12 (kindergarten to Class 12) schools in India which offer International Baccalaureate curriculum and International General Certificate of Secondary Education: "While we have introduced some franchise schools, we were unable to invest in land and building due to the constraints on the built-up area and land area requirements for construction under the FDI norms. Now that conditions have been relaxed, we can own land and buildings for schools."
Schools Sense Opportunity
While B-schools cannot be run on rented premises, the same does not hold true for schools and colleges. In fact, regulations at the state or centre do not require trusts to own school infrastructure. But investors such as Temurnikar believe that the new rules which allow them to own property will be beneficial in the long run. "It does make it easier to own property in land-scarce places like Mumbai, as rentals would otherwise be astronomical," says Temurnikar. With DIPP dropping the Press Note 2 requirements, he will now look at investment opportunities in India. Vice chairman and managing director of Shemrock & Shemford Group of Schools Amol Arora says, "Now we can tap foreign players who can invest and set up infrastructure."
The amendment will especially benefit foreign K-12 players who are looking to expand in the country. Dubai-based Global Education Management Systems (Gems) plans to open over 100 schools, offering an international curriculum, in the next five years. It currently manages 10 schools and owns seven. There are some 300 international schools in the country and as per Kaizen Partners, an education-focused PE fund, the K-12 segment is witnessing a growth of 14 per cent year-on-year in revenues.
While the amendment indicates the government's desire to increase FDI in education, there are several other regulations that compromise, and even negate the benefits of this move.
The changes will particularly benefit B-schools and foreign K-12 players
The Ministry of Human Resources and Development and the Ministry of Economic Affairs have allowed 100 per cent FDI in education since 2002. But investments have not come in due to several reasons. First, any entity setting up a school or college or a deemed university has to be a non-profit organisation. This means that the promoter cannot earn a dividend and since trading is not allowed, even the share capital is not of much use.
Second, any not-for-profit entity receiving foreign funds (under Foreign Contribution Regulation Act) has to comply with stringent guidelines, as per the Ministry of Home Affairs. "Since all education entities come under private trusts, such rules discourage educational institutes from tapping foreign funds," says Ramana.
But such handicaps are being sought to be addressed via alternate routes. In May 2011, the Ministry of Economic Affairs declared that when education is structured in the PPP format (public-private partnership), an educational project in its entirety can be classified as an infrastructure project and all the benefits of that classification can be used for viability gap funding and long-term financing. "It makes sense as it is much easier to get infrastructure funding. Any trust with a land bank can approach foreign investors and investors earn a financial return in due course," says Ramana. Adds Amitabh Jhingan, partner at Ernst & Young: "This amendment will allow more players to build education infrastructure with foreign capital being available to fund these assets. Hopefully, there would be more education capacity created as a result."
(This story was published in Businessworld Issue Dated 02-04-2012)