The education sector is emerging as one of the largest service sectors in India, with strong growth drivers. Indians? aspirations for high quality education, a growing population, a lack of adequate infrastructure etc are some of the key factors leading to a huge demand-supply mismatch and the need for massive investments in the Indian education sector. The sector is already witnessing a lot of interest, with more and more foreign players in education and real estate fields eyeing opportunities in India either through joint ventures/collaborations or through independent set-ups.

Our education sector is also one of the most important sectors from the perspective of India?s social and economic development. The government has also realised the need for private/foreign players? participation in bridging the demand-supply gap and is making serious attempts to reform the sector by introducing new legislations like the Proposed Foreign Education Bill and by fostering public-private partnership models.

On the regulatory front, 100% FDI in the education sector is allowed under automatic route since February 2000. But there was an ambiguity on whether construction-linked conditions are required to be satisfied in case of investments in education infrastructure.

Considering that education is a priority sector, representations were made by various forums to do away with the stringent conditions as far as education infrastructure is concerned. In fact, in July 2011, the Department of Industrial Policy and Promotion had circulated a proposal to relevant ministries on withdrawing certain construction-related conditions to boost foreign investment in the Indian education sector. Further, due to peculiar infrastructure requirements for schools, colleges, universities, vocational institutes etc, it was not viable to satisfy all the stringent construction-linked conditions.

The government has paid heed to the aforesaid recommendations and recently taken a step in the right direction by clearing the air on the above ambiguity vide bi-annual Consolidated FDI Policy Circular No 2 of 2011. The government has exempted the Indian education sector from complying with the stringent construction-related conditions of minimum development criteria, minimum capitalisation, investments lock-in etc, in line with other sectors of national importance (hotels & tourism, hospitals etc).

Here is a brief synopsis of conditions that would not apply to the education infrastructure with the above exemption:

Minimum development under each project: Built-up area of 50,000 sq mt in case of construction-development projects.

Minimum capitalisation of $10 million for wholly-owned subsidiaries and $5 million for joint ventures with Indian partners. Further, the funds have to be brought into India within six months of commencement of the business of the company.

Original investment cannot be repatriated before a period of three years from the completion of minimum capitalisation. However, repatriation is allowed before a three-year period subject to FIPB approval.

At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances.

The liberalisation of the above conditionalities is a positive development that would lead to substantial FDI inflows into the education sector and will provide much needed thrust to the sector. This clarification also reiterates the government?s intention to provide requisite impetus to a social sector such as education.Still, will the relaxation applies prospectively or retrospectively? One hopes that the government provides some clarity in order to establish fair play to the existing investments made by foreign players in education infrastructure.

The Indian education sector is going through a revolutionary stage and is expected to witness a lot of action on the reform front. While the government has made its intentions clear on various occasions to bring in the requisite legislations in order to open the doors for foreign education service providers or infrastructure providers and effectively regulate the education sector, there have been delays in the enactment of legislations due to the stiff opposition faced by the government. The government can also relook into the existing not-for-profit status in formal education set-up in order to make it more reasonable and investor-friendly. Amidst this environment, liberalisation of the FDI norms is a welcome and much appreciated move by the government and will certainly boost investor confidence and investments in education infrastructure.

The author is executive director, KPMG