MEASURES TO FACILITATE INVESTMENT IN HIGHER EDUCATION UNDER CURRENT LEGAL FRAMEWORK
Draft Note by Dr. P.V. Ramana to the CII Higher Education Committee, prepared by the Task Force constituted on May 27, 2011
Task Force Members
i) Dr. P.V.Ramana – Chairman, ITM Group – Convenor
ii) Sri Dhiraj mathur – Executive Director, PWC
iii) Sri Ajay Kapur – Director, Higher Edu Initiatives, Oracle Corp
iv) Sri Amit Kaushik – Director, Educaiton Strategy, CISCO
v) Sri J V Ramamurthy – President and COO, HCL Infosystems
vi) Sri Sashikant Singhi – Director, Poornima Group of Colleges
vii) DR A S Khalsa – Director, iPer
Note: This is a first draft for internal circulation of Task Force members.
Submitted for comment, suggestion, additions and deletions.
1. FDI and FCRA: As per current law 100% FDI is allowed in education. For-profits are not allowed to get licenses from University Grants Commission and AICTE or under Private University Acts of different states. Hence the investment vehicle is often a Society or a Trust or Section 25 Co. As only Sec 25 Co can issue share capital, it is the most preferred medium for investment. Money flows into the operating non-for-profit from an Indian corporate, or a Fund in India or abroad or from a foreign collaborator. Wherever there is a foreign source direct as in case of most VC and PE investments, or indirect in the sense that the investing company has foreign shareholders or has access to foreign funds, the FCRA act comes into play. While all legal authorities and Big-4 Accountants are of the firm opinion that investment in a Sec 25 company being in exchange for a share subscription, does not come under FCRA, investors are jittery since the FCRA legislation has harsh penal provisions.
What is required: A clarification from Home Ministry that FCRA is not applicable for investments under automatic FDI in a Sec 25 Co against equity subscription, and that the Sec 25 Co receiving such investment is deemed to have fulfilled all its compliance requirements upon filing requisite RBI returns for inward remittance and issuing equity against such a remittance.
Action: Appeal to Home & Law Ministries
2. Can a Sec 25 Co issue shares to the public in an IPO? I have had some discussions with SEBI some years ago, when Sri Damodaran was SEBI chief. Some impressions gained:
a. Share issue at par is not a problem, and I was asked to file a RHP. Since lack of clarity, I did not do so
b. The real problem lay in the CCI formula for share valuation. Some opinion states that since no dividend distribution was possible, share of Sec 25 Co can only be valued at par. Others differ and say that a Sec 25 Co can be valued and traded at a value that reflects market demand and underlying business and asset valuation, and potential for growth.
c. If a Sec 25 Co can do an IPO, a vast channel for gathering public funds for Regulated Higher Education opens up. There is great appetite for Education sector shares, and this needs to be done
What is required: A clarification from MCA and SEBI, that a Sec 25 Co can issue capital to the public in an IPO or private placement, and that it will not lose tax exemption and not-for-profit status just because shares are valued above par. Any tax impact is in the hands of share holders, for Capital Gains. There is no dividend distribution and no taxes allied to a dividend payout.
Action required: An appeal to MCA and SEBI, and CCI for clarification and issue of a Press Note on this subject.
3. Bond Issue: There is talk in the Finance Ministry that tax-exempts like Societies, Trusts and Sec 25 Companies may be allowed to issue bonds. Can these bonds be traded? Zero coupon bond with a convertibility option? Credit rating for a bond issue? (CRISIL is rating Edu Institutions treating them in the SME Segment – ITM is CRISIL rated “A”, the highest possible in this segment). What is the security for the Bond Custodian?
4. Special Class of Companies for Regulated Education? There is talk of removing tax exemptions from Trusts and Societies engaging in ‘commercial’ privately financed ‘regulated’ higher education. The underlying thought process is the fact that many of these institutions have acquired huge asset base, and have proved to be a source of black money generated in the form of Donations and Capitation Fee. The obvious move forward is to create a special class of partially tax exempt companies on the lines of Sec 501 (c) company under the US Tax Code.
a. Flat tax of say 10% on taxable surplus
b. Shares can be valued, traded and issued to public just like any commercial share issue, under existing SEBI regulations
c. No bar on shareholding resident, non-resident, foreign individuals and companies etc (At present a Sec 25 Co has no such restrictions)
d. No dividend distribution at option of the Co. Max limit of 10% on any dividends Action required: Note to be submitted to MCA, MoF and SEBI for amendment to Companies Act, and IT Act
5. Education as Infrastructure: Regulated Higher Education requires huge investment in Land and Building. Land requirement is onerous – Private universities need 10 to 25 acres in Metro and 50 to 100 acres in Towns and Rural areas. Thereafter at least 100,000 to 200,000 sft of built academic spaces are required. Total infrastructure budgets exceed Rs 200 Cr at a minimum for a modern first class university set up in the initial start up phase itself. While the government thinks nothing of annual grants of 100’s of crores for existing IITs and IIMs, there is no money for new institutions, and no safe way for any ROI on such investments made by private entrepreneurs. It is important to not ehere two comments made 10 years ago by a full SC bench in the TA Pai case:
a. The idea that education is noble and charitable is giving way to a view that education is a necessity and must survive by generating a required surplus
b. An academic degree is a private good for private gain, and not to be always considered as a public good for public gain!
Keeping this in view, it is eminently practical to declare Education as fulfilling the norms of infrastructure, and make it eligible for legal and tax treatment that is now accorded to Infrastructure.
Some required changes:
• Press Note declaring Education fixed assets as Infrastructure
• Permit Infrastructure companies to build and lease academic, administrative and hostel/residential spaces to the Institution, with such lease costs being eleigibel for cost recovery as part of tuition calculation by Fee Fixation and Review committees
• Lease rents to be a revenue expense
• Permit operations in long lease premises (greater than say 10 years) where academic space requirement is less than 50,000 sft, and waive land requirement in Metro cities
• Permit the institution sponsor to own the land & building and charge a lease rent to the institution or the program (This moves the Depreciation and Interest from a tax-exempt entity to a Taxable entity, and at the same time increases revenue to government as the lease rents are taxable)
• Enable Education Infrastructure companies to function like housing finance companies
• Allow Engineering and Technical institutions to be built in the compounds of large manufacturing and technology companies (Automobile, Machinery Mfg, Pharma, IT, Hotels etc) to integrate training and a working academia/industry interface
Action required: – Appeal to MHRD, University Grants Commission, AICTE, MCI etc – Appeal to MoF
6. A gradual approach to permitting for-profits to launch Higher education: Everywhere in the world including China, for-profit corporations have been allowed entry into this field, subject to the same regulatory framework, except that they are subject to tax. Is a graduated approach to this possible?
a. Permitting Sec 25 Co shares to be traded and valued by the market
b. Minimum Taxation on Trusts and tax-exempts, bringing them gradually to the same footing as taxable companies, dividend limits, prohibiton of dividend to promoters, etc
c. Allow PLC’s to sponsor Sec 25 Co as closely held. (They can merge financials and show earnings accretion in parent co, without actually taking money out of the tax-exempt domain. Increase in valuation will take place in parent co shares, not in in Sec 25 Co shares)
d. Treat Sec 25 Company as having a special tax status, while being on par with a PLC for raising capital, and a maximum fixed earnings distribution
e. Permit PLC to engage in regulated Higher Education field, just like in the USA All these are feasible and have been discussed by policy makers at one time or the other.
A concerted approach and pressure will make change happen gradually.
Any other angles to be investigated?
Please mail your comments to the core group first. Any comments posted in this blog will find their way into the final draft for consideration by the committee