September 17, 2021

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Investing in the education sector

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Image source: https://www.teachhub.com/classroom-activities/2009/05/top-12-pioneers-in-education/

This article has been written by Anupam Bhaduri pursuing a Diploma in Merger and Acquisitions (PE and VC transactions) from LawSikho.

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The Constitution of India recognized the right to education as a fundamental right protected under the provisions of Article 21A on 1st  April 2010 and became one of the 135 countries that have walked down the same path. The Indian government went forward and enacted the Right of Children to Free and Compulsory Education Act on 4th August 2009. Through this Act, the government planned to ensure that children between 6-14 years of age receive free and compulsory education. Approximately, 26.31% of the population falls within the upper boundary of 14 years in age. Hence, in a move to enhance the quality of education imparted and with a view to better the infrastructure, the Indian government opened the gates of education to foreign investors. This article delves deeply into the paths we have tread till now and what can be the potential future

Ever since the launch of economic reforms of 1991, the substantial economic growth of India has cemented its place in the global economy. The pace of reforms has been steady and the gates that had been opened to foreign direct investment (FDI) back in 1993 have been widened over the years. 

As per the regime, 100% of FDI was allowed into the educational sector through the automatic route. The Consolidated FDI Policy that was released in 2017 further exempted the construction development activities in the education sector from the lock-in period of three years from the date of completion of minimum capitalization. However, despite all of this, FDI has remained scanty in the education sector and the surface of the following reasons as the most significant for such a trend :

  • Prevailing regulations allow schools to only be a non-profit body. This means that schools can only be set up by a Society or Trust or by a company registered under Section 8 of the Companies Act, 2013. The complication that arises here is that despite the funding opportunities, a Trust is not allowed to receive FDI. A similar predicament is faced by Section 8 companies that are charitable by nature. The regulatory framework states that the profits earned or any income generated must distribute it for the promotion of culture, art, charity or science. 
  • There is a significant lack of streamlining the effects of the Centre and the States in this regard. Although the RTE is the backbone for all policies regarding it, the sheer lack of coordination between the States and the Central Government is an issue that needs to be addressed. 
  • This lack of proper streamlining of processes is also reflected in the potential legal disputes that could arise due to the transfer of existing human resource and infrastructure.
  • The investment environment surrounding the education sector has a web of cumbersome compliance requirements. There are too many regulatory compliances to be made and approvals to be sought. The ‘for profit’ ventures in the educational sector have uncertain regulations. 

As we have now seen, FDI was always open for the education sector to its maximum possible limit. However, the reaction to it had been lukewarm to say the best. In order to correct the scenario, the government, in its Budget 2020, allowed the educational institutes to source funds through external commercial borrowings (ECBs). This was done in the hopes that the funding would fuel the research institutes to build better infrastructure. 

Upon careful observation, we can conclude that this is in ties with the ‘Digital India’ campaign of the GoI. The   Finance Ministry stated that the government was aiming at providing education up to degree courses entirely through the online mode. However, such courses could only be designed and conducted by the institutions that have been ranked in the Top 100 of NIRF. The aim to retain students in India is appreciable and opening the gates for funding with cheaper interest rates is beneficial to both the students and the education sector as a whole. It is also noteworthy that for this to be of effect, the Foreign Contribution (Regulation) Act will have to ease the requirement for trusts., SEO, Wordpress Support & Insurance, Mortgage, Loans, Legal, Etc Blogs

Although regulatory uncertainties are a massive pain point for investors, that alone is not sufficient to deter them. Moreover, ed-tech companies or companies that provide educational services need not confine themselves to the ‘not-for-profit’ status. In most cases, education-centric laws do not apply to them either. Keeping this in mind, the most likely place for foreign investors to invest in would be the companies that provide educational and construction services to the educational institutions. This opens a wide array of options to investors that include management services, design curriculum and provide adequate training to teachers. The advantage of investing in these segments is that these are market players that span across the length and breadth of the education sector, irrespective of schools and colleges. 

Other possible segments that could be eyed for aggressive investment plans are

  • Test-prep services- The increasing difficulty of getting through a state/national level entrance exam for college and job opportunities has forced tutoring as a practice to undergo a monumental change. The faith in the institutional methods and the teacher-centric approach has greatly changed to accommodate the promise of performance and content delivery model. Investment in this sector is important because the businesses catering to the students have high scalability promises. However, this scalability can only take place if the business continues to deliver a consistent quality of teaching material and are able to cater to the individual needs of the students. In order for them to be able to do so, these businesses would require to streamline themselves with the technological methods of delivering content assessing students, and benchmarking them for self-paced learning. The key to investing in a successful business in this market segment would require the investor to make significant Investments from time to time and develop a long investment horizon before banking on the profits.
  • Vocational education- given the multitude of population and the per capita income distribution of India in most cities, the students that graduate from colleges are far more inclined to take up a job rather than pursue higher education in the form of research opportunities. However, from an industry-specific point of view the students that graduate are not employable in the industries because they lack significant practical exposure. This is where the investors could focus on investing in private players that provide upskilling opportunities to students so that they can find themselves employed in the IT and hospitality sector. At present, the IT training market is one of the biggest vocational course segments and is projected to run into a multi-million dollar industry. 
  • Educational services- foreign investors could provide investment opportunities to educational institutions that serve to train and develop the skill of students to enhance the chances of employability. This market sector is different from vocational training in the sense that the purview of regulations does not cover educational services that are delivered to students on a profit basis. Foreign investors could look into the PPP program to design courses based on employability in specific industry sectors.
  • The PPP model- The PPP model in education is basically a union between the non-profit activities carried out by a for-profit administration running the educational institutions. The Supreme Court has previously ruled that the institutions that operate within the education sector are necessarily non-profit in nature. However, a reasonable surplus accumulated from the running of such institutions is allowed, making PPP a preferable model for foreign investors who are unsure about long-term investment into the Indian demographic. All investment firms provide technical support apart from monetary support. Hence the foreign investors could enter into the higher education sector and provide infrastructure investment and advice on the capacities for future expansion. This market segment is already inundated with private players who have established niche models like Basic Infrastructure Model, Outsourcing Model, Equity or Hybrid Model, and Reverse Outsourcing Models. Being in sync with the current market trends, foreign investors could find a solid and safe footing into the education sector through this market segment. Another advantage of the PPP model is that the investors could construct educational hubs in different parts of the country which would benefit both the large public and the private sector enterprises as they are funded by the corporate social responsibility regulations. Essential inputs and infrastructure help could be extended by the state governments concerned.
  • Ed-tech- Given the ongoing pandemic, the biggest market player in the educational sector right now is online education platforms. Compared to an educational institution the online education platforms are drawn on a significant low-cost basis since their programs are offered online and no investment is required into establishing assets other than intellectual property. While Byju plan on going for an IPO in the near future, other online education platforms are also thriving given that trend the students are avoiding physical coaching centers and underlying on most self-paced module education models from the advantage of their homes. If this was not enough to show promise to an investor, a report by the KPMG has indicated that the industry of online education is supposed to grow by 8 times in India by the end of 2021. 

It would be unwise to say that foreign investment would flow is based on the fact alone that the Indian population is significantly dotted with children up till 14 years of age. If that were true, the foreign funding landscape would have bloomed ever since the FDI borders were loosened in 2002. However, that has not been the case as the foreign investors did not find any merit in the existing regulatory framework of the Government of India. By allowing access to instruments like ECB, the industrialists and the academia alike believe that education institutes will now be able to reach out for foreign funding at much lower interest rates than limiting their options to the cash-strapped Indian banks. 

  1. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Investment-in-Education.pdf.
  2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2774664.
  3. https://www.mondaq.com/india/inward-foreign-investment/535572/fdi-in-indian-education-sector.
  4. https://www.fdi.finance/sectors/education.
  5. https://www.ibef.org/industry/education-presentation.

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