The Government of India ("GOI") has allowed for 100% Foreign Direct Investment ("FDI") in the education sector under the automatic route. Recently, GOI also allowed for 100% FDI in the Construction Development projects which would also include educational institutions. These investments are also carried through the automatic route.
However, despite allowing 100% FDI in the education sector, there has hardly been any investment in this sector and the response from foreign investors has been very lukewarm, to say the least.
The primary issue behind the lack of investment is the fact that the investment has to be done through a not-for-profit entity. The not-for- profit character would inevitably require the Indian entity to be either registered as a Society or a Trust (in case of schools, colleges and private/deemed universities) or a Section 8 Company (mostly in case of schools) under the Companies Act, 2013. This not-for-profit requirement has become a major bottleneck for attracting investments.
Further, a Trust or a Society is also not eligible to receive foreign investments under the automatic route. Even if investments are to be permitted, the entities being of a non-profit nature would not be able to distribute any returns on the investment.
A Section 8 Company is of a charitable nature and hence would require applying its profits or other income towards the promotion of its objects.
In addition, the procedures and conditions are still very much unclear with regards to how the foreign investment regulations for education sector would be enforced. This will lead to various issues with regard to the overlapping regulations of Centre and States.
Multiple regulators along with the requirement of numerous approvals and regulatory compliances have hampered investor confidence in investing in this sector.
Hence, the solution to this problem could be to drop the mandatory requirement for a not-for-profit character. This would increase foreign investors confidence since they would be assured of returns on their investment.
Further the regulatory mechanism can be eased to ensure that there is clarity with regards to all the approvals and clearances required for such investments.
Finally, detailed guidelines should be laid down regarding routing of such foreign investment to ensure that there are no confusions with regards to the foreign investments in the education sector.