In this blog post, Khushboo Tatia, a practising Advocate and Solicitor and Proprietor at KTP Legal, Mumbai, a student, pursuing  a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, provides business structuring ideas to individuals who want to start a private university in India, and have Investors who may want to leave the business. 

 

Introduction

In the current era of the emerging and fast growing Indian economy, private players, both domestic and international, are evaluating investment prospects in the country into various avenues. There has been ever-increasing demand for skilled personnel by Business Corporations as well as has opened new windows of opportunities for entrepreneurs and fresh business start-ups. This ongoing process of expansion and diversification of capital into the country has simultaneously led to the emergence of expansion in the education sector. 

The government on the other hand too strives to facilitate the infrastructure for providing education even in the most remotely possible location and hence has invited self-financed private universities by granting them the status of Deemed University, subject to the norms as laid down. However, even though gates have been opened to private players in the Indian education sector, the Government yet strives to avoid commercialization of this sector by restricting the eligibility to only not-for-profit organisations such as societies and trusts. However, an ‘operate and manage’ model is now legally acceptable which enables a for-profit model in India.

 

Who Can Establish A Private University In India

Universities in India are governed by the Universities Grant Commission Act, 1956 and various Rules and Regulations formed under it. According to Regulation 2.1. of the said Regulations, a Private University can be duly established by a Sponsoring Body, which may be either;

• a Society registered under the Societies Registration Act 1860 or any other corresponding law for the time being in force in a State, or
• a Public Trust, or
• a Company registered under Section 25 of the Companies Act, 1956 (i.e. Section 8 of Companies Act 2013)

Further, Private Universities can only be established under a specific State Act and is entitled to operate within the jurisdiction of that concerned state. The establishment of private universities is further governed by UGC (Establishment and Maintenance of a Private University) Regulations, 2003.

While most of the states grant permission or issue NOC only to non-profit entities imparting or intending to impart primary or secondary education in India, the state of Haryana permits even a company (which may either be for-profit or non-profit) incorporated under the Companies Act to establish and maintain schools.

 

Business Structure Of A Private University 

The fact that only a not-for-profit organisations can enter and establish itself into the Indian education industry has restricted investments directly into such institutions. However, looking at the immense opportunities of a substantial ROI, investors (both domestic and international) have now been allowed to invest into companies that provide education and construction services to such educational institutions. This would entitle them returns through two routes;

• Firstly, through periodic management fee by entering into a service agreement between the Sponsoring Body and a company (in which interested investors may invest).
• Secondly, through the dividends declared or interest paid by such companies (who provide services to Sponsoring Body) depending upon the nature of the investment (equity or debt).

 

Relevant Applicable Tax Laws

Educational institutions set up as not-for-profit organizations are eligible for certain tax exemptions, as provided under the Income Tax Act, 1961 (ITA), subject to satisfaction of certain conditions, such as:

• The educational institution will have to qualify as a trust set up for a charitable purpose; education is covered within the definition of ‘charitable purpose’ as defined in Section 2(15) of the ITA;
• The educational institute will also have to fulfil certain other conditions in respect of utilisation of income (i.e., income derived from property held under charitable trust must be used predominantly for charitable purposes), etc., as prescribed under Sections 11 and 12 of the ITA;
• The educational institution should be registered under section 12AA for availing such tax exemptions.

Alternatively, if any university or another educational institution existing solely for educational purposes obtains registration as prescribed under Section 10(23F), it could claim income tax exemption from income earned by it.

 

 

Investing In A Private University In India

The government now allows a 100% FDI in the education sector. An example of the benefit of this scheme can be seen in the medical sector where various multinational hospital chains having branches across the world have been allowed to set up medical colleges anywhere in India.

 

Exit Option For An Investor

In order to ensure a timely exit of investment whereby balancing fairness for both, the company as well as the investor,it is essential to pre-define various exit strategies before executing the Investors’ Agreement, as deemed fit by both parties.

Such strategies would depend n upon the nature of the investment, general business environment and the business model of such company. Various options which are generally adopted are:

• The company may repay the investor by utilising its retained earnings of over the years.
• Private buy-out of the debts/equity of the investor either by the management themselves or through a third-party investor.
• Mergers or Acquisition is another alternative to raise capital and exit the project, where a part or the entire company (which provides services to the Sponsoring Body) shall be available for sale.

 

 

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REFERENCES

• Investment in the Education Sector – Nishit Desai Associate.
• Investment Opportunity in Education sector, by Invest India a National Investment Promotion Agency(http://www.investindia.gov.in/education-sector/).
• Analysis of Private University Laws And Recommendations for Policy from Symbiosis (http://www.scdl.net/pdf/PRIVATE_UNIVERSITIES_ANALYSIS.pdf