India’s US$40b education market is experiencing a surge in investment. Capital, both local and international, and innovative legal structures are changing the face of this once-staid sector. The liberalization of India’s industrial policy in 1991 was the catalyst for a wave of investment in IT and infrastructure projects. Rapid economic growth followed, sparking a surge in demand for skilled and educated workers. This, combined with the failure of the public system to provide high-quality education and the growing willingness of the burgeoning middle class to spend money on schooling, has transformed India’s education sector into an attractive and fast-emerging opportunity for foreign investment Web Posting Reviews.

Despite being fraught with regulatory restrictions, private investors are flocking to participate in the “education revolution.” A recent CLSA (Asia-Pacific Markets) report estimated that the private education market is worth around US$40 billion. The K-12 segment alone, which includes students from kindergarten to the age of 17, is thought to be worth more than US$20 billion. The market for private colleges (engineering, medical, business, etc.) is valued at US$7 billion, while tutoring accounts for a further US$5 billion.

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Other areas, such as test preparation, pre-schooling, and vocational training, are worth US$1-2 billion each. Textbooks and stationery, educational CD-ROMs, multimedia content, child skill enhancement, e-learning, teacher training, and finishing schools for the IT and BPO sectors are some of the other significant sectors for foreign investment in education.

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Opportunity beckons

The Indian government allocated about US$8.6 billion to education for the current financial year. But considering the significant divide between the minority of students who graduate with a good education and the vast majority who struggle to receive basic elementary schooling or are deprived of it altogether, private participation is seen as the only way of narrowing the gap. Indeed, it is estimated that the scope for private participation is almost five times the amount spent on education by the government.

CLSA estimates that the total size of India’s private education market could reach US$70 billion by 2012, with an 11% increase in the volume and penetration of education and training being offered. The K-12 segment is the most attractive for private investors. Delhi Public School operates approximately 107 schools, DAV has around 667, Amity University runs several more, and Educomp Solutions plans to open 150 K-12 institutions over the next four years. Coaching and tutoring K-12 students outside of school is also big business, with around 40% of urban children in grades 9-12 using external tuition facilities.

Opening the doors

Private initiatives in the education sector started in the mid-90s, with public-private partnerships set up to provide information and communications technology (ICT) in schools. Under this scheme, various state governments outsourced the supply, installation, and maintenance of IT hardware and software ands teacher training and IT educatio in government or government-aided schools. The central government has been funding this initiative, which follows the build-own-operate-transfer (BOOT) model, under the Sarva Shiksha Abhiyaan and ICT Schools programs. Private companies such as Educomp Solutions, Everonn Systems, and NIIT were among the first to enter the ICT market, which is expected to be worth around US$1 billion by 2012.

Recently, the central government invited private participation in over 1,000 industrial training institutes and offered academic and financial autonomy to private players. Companies such as Tata, Larsen & Toubro, Educomp, and Wipro have shown a keen interest in participating in this initiative.

Regulatory roadblocks

Education in India is regulated at both central and state government levels. As a result, regulations often differ from state to state. K-12 education is governed by the respective State School Education Act and the Central Board of Secondary Education (CBSE) Rules and Regulations concerning affiliation and the rules of any other affiliating body. Under current regulations, only not-for-profit trusts and societies registered under the Societies Registration Act, 1860, and companies registered under section 25 of the Companies Act, 1956 qualify to be affiliated with the CBSE and operate private schools.

While the K-12 segment accounts for the lion’s share of India’s educational market, weaving through the complex regulatory roadmap to qualify for affiliation poses serious difficulties for investors. The CBSE requires privately funded schools to be non-proprietary entities without any vested control held by individuals or family members. In addition, a school seeking affiliation is expected to have a managing committee controlled by a trust, which should approve budgets, tuition fees, and annual charges.

Any income accrued cannot be transferred to the trust school management committee, and voluntary donations for gaining school admission are not permitted. The trust’s schools and higher education institutions are entitled to exemptions from income tax, subject to compliance with section 11 of the Income Tax Act, 1961. To qualify for tax exemptions, the trust needs to ensure that its predominant activity is to serve the charitable purpose of promoting education instead of the pursuit of profit.

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