Foreign funding in education: What needs to be done

The draft National Education Policy, 2019, which was released for public consultations in May 2019, envisions the need for a transformation of educational institutions – whether it involves a strategic shift in the quality of learning outcomes, contemporary teaching methodologies, upskilling of teachers, improved infrastructure or high impetus on research and innovation. The vision outlined in the policy completely resonates with the present status of the sector.

However, this transformation does demand a huge capital expenditure on the sector.

Finance Minister Nirmala Sitharaman has recognised the urgent need to work towards transformation in the education sector and made a welcoming announcement in the first budget session of the decade to enable foreign funding in education through either strategic foreign investment or availing a foreign currency loan.

There is no doubt that India’s education sector is poised for exponential growth and presents a great investment opportunity, given the country’s favourable demographics. Foreign funding avenues to supplement the present public expenditure in the sector can help harness the potential of the sector and exploit this demographic dividend to its fullest.

Having said this, the finance minister has rightly used the phrase “enable sourcing external commercial borrowings and FDI”, as the current laws in the country governing the education sector are not aligned for receipt of foreign funds.

Due to the requirements of the sectoral regulations, educational institutions in India are usually structured as not-for-profit trusts or societies. While foreign direct investment (FDI) in the education sector is presently allowed for up to 100% under the automatic route from a sectoral cap perspective, the exchange control regulations do not permit foreign investments in such types of trusts or societies. An amendment in exchange control regulations to this effect would be the first step to allow such liberalisation.To draw a parallel, similar permissibility exists under exchange control laws for investment trusts to receive FDI.

Even if the educational institutions are set up as a not-for-profit company under section 8 of the Companies Act, receipt of FDI would be subject to prior permission or registration with the Ministry of Home Affairs under Foreign Contribution Regulations. This process is extremely cumbersome and time-consuming. The business rationale to meet funding requirements sometimes needs urgent solutions and cannot wait for a long-drawn process. There is also a need to streamline such approval processes.

As an additional avenue to strategic investment, the finance minister has also mentioned availing foreign currency loans by educational institutions. The present norms governing foreign currency borrowings by Indian entities permit only FDI-eligible entities to raise foreign currency loans from lenders outside India. An educational institution set up as a trust or a society is not an FDI-eligible entity for this purpose. Hence, foreign borrowings have so far remained an elusive avenue for funding the needs of education institutions in the country. A liberalisation under the foreign currency borrowing regulations will help meet educational institutions’ needs, more so because the borrowing costs from overseas can be lower compared to domestic leveraging.

In addition to the above, there would be a need to align the same with the sectoral laws too – University Grants Commission (UGC) guidelines, All India Council for Technical Education (AICTE) regulations, state university laws, K–12 affiliated board regulations, etc.

The government may need to consider the abovementioned steps for implementing the proposed policy pronouncement.

Having said that, it is also important to assess the pragmatism of such a policy liberalisation. Given the inherent not-for-profit business model in the sector, even if above changes are affected to allow FDI in educational trusts/societies, will the investments still happen, given that there cannot be repatriations from such entity structure? And does that mean that it is time to revisit the not-for-profit model?

While the government can consider this while making other regulatory changes, it is important to ensure that the social needs of the sector are balanced with the need for required foreign capital. But for now, the government must be applauded for this bold announcement. A quick implementation though holds the key for the sector.

Views are personal

The author is executive director, Tax and Regulatory -PwC India. Vandana Sagar, associate director - Tax and Regulatory, PwC India also contributed to this article.