Narendra Modi’s India is opening itself up to foreign and domestic investment. Could this create opportunities for education businesses targeting the country, asks Zahra Saeed

Indian summer

With Russia crippled by western sanctions, Brazil caught up in corruption, and

China’s longstanding financial boom finally on the wane, India seems to be the only BRIC country enjoying robust economic growth. This can only be further bolstered by Prime Minister Narendra Modi’s latest budget unveiled in February, which demonstrated a focus on business-friendly policies and enthusiasm for both foreign and

international investment. In a country which boasts the world’s largest school system, and where private schools are sprouting up at a faster rate than their public counterparts, could this spell good news for businesses seeking inroads to Indian education – a market long seen as prohibitive to private enterprise?

There are a number of key businesses, both domestic and foreign, already active in the country; private equity has also show interest in the space, so too the markets. Perhaps the best

known operators are to be found in the K-12 space; Ryan International Group for example has more than 128 schools aimed at India’s upper-middle class, spread across 18 states. Educomp Solutions, which targets a similar demographic, provides services for around 13 million students at private and state schools across the country. It once boasted of being India’s largest diversified education provider, although debt restructuring has forced it to divest; Pearson has already bought out Educomp’s 50% stake in

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IndiaCan, the vocational training joint venture set up by the two firms, and Educomp was rumoured to be mulling a sale of its schools division last October.

A number of businesses are also serving poorer segments of society with low cost schooling offers. Dream India Schools has 32 sites across five states, and Dubai’s GEMS Education has six schools charging from as little as US$3 (£2) a day. The Pearson Affordable Learning Fund (PALF), a social impact fund bankrolled by the global publisher,

has also invested in this area, backing Sudiksha pre-schools, Avanti college test preparation centres, and Zaya, a Mumbai-based blended learning start-up.

Like others, PALF would like to grow its school businesses in India, but it is wary of running into a dense thicket of regulations. “The only missing link in India compared to our global portfolio is that we don’t run any chains of schools,” says Arvind Nagarajan, business development manager. “A lot of this is down to the complex regulatory

Karan Khemka, managing director, Parthenon-EY

environment around owning and operating private schools in India.”

That complexity has nothing to do with PALF’s foreign status; in fact it’s fairly straightforward for foreign firms to make direct investments in the country. Rather, the issue revolves around the requirement that all schools in India must be registered as non-profit and need to take the form of a trust, a society, or what is known as a Section 25 company. The challenge therefore for private investors is how to extract money and get a return on their investment. They do this by creating a ‘management’ company which takes funds out of the trust or society in the form of various fees.

“The issue is that this management company and trust structure has not been sufficiently clarified and tested in the courts. And that is what makes foreign investors very nervous,” explains Karan Khemka, managing director and co-head of the education practice at Parthenon-EY.

In other words, anyone who invests is taking the risk of the Indian government retrospectively branding them criminals for making a profit out of schools. An unlikely scenario, but not one that can be ruled out.

Higher purchaseFor Khemka, the greatest opportunities lie in higher education in India, but investors so far have been wary due to even stricter regulations and a similarly untested grey area when it comes to making a profit. “If you open a private university in India it’s like having a licence to print your own money. There just aren’t enough seats in the system to meet the demand. Universities also get very big; you can’t have a 20,000-student school but you can have a 40,000-student university. It’s a terrific commercial opportunity. But the sector is just so hyper-regulated, that for a foreign investor it’s tough.”

Nonetheless, the world’s largest for-profit education provider, Laureate Education, has taken the plunge and opened three universities in India. Perhaps a function of being a larger firm is having access to the legal support necessary to navigate tricky regulations? “It certainly makes it easier when we have the legal counsel that we use to

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advise us,” says PALF’s Nagarajan. “I just don’t know what the alternative is for smaller companies.”

Perhaps a less risky area of opportunity for prospective investors is English language teaching (ELT), for which demand is growing fast. In an article he recently wrote for indiaincorporated.com, Nagarajan stated that fewer than half of children at Grade 5 level are able to read a Grade 2 level English text. And with top government and IT jobs generally requiring fluency, most parents believe that a good knowledge of English is a ticket to joining the middle classes. Currently providers like the British Council hold big stakes in the market, but Nagarajan believes there is more room for quality providers.

According to PwC’s recent report, ‘Future of India – The Winning Leap’,

even those who stay in school graduate lacking the skills and knowledge to find good jobs, hence the immense need for vocational training in India. One possibility, the report suggests, is to create multipurpose facilities that can operate as not-for-profit schools during the day and as for-profit vocational education and training centres in the evenings.

Nagarajan is cautiously optimistic about vocational training: “If you look at India compared to China, the market for vocational training is a lot bigger; there’s a lot of growth available and a lot of government funding for it. But whenever there’s heavily subsidised approaches the risk is always to make sure that companies are still really providing services that consumers value. If they’re paying very low costs there’s risk to the

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long-term business once government subsidies run out.”

À la ModiSo can any of the business-friendly measures put in place by Narendra Modi’s government provide respite for investors in the private education sector? Already we have seen a relaxation in foreign investment rules over insurance, real estate and military contracts. The latest budget, widely hailed as positive for growth, included a £7.3 billion increase in spending on infrastructure and an overhaul of tax rules in a bid to assure investors of a stable, predictable and fair system.

However, the only noteworthy measure when it came to education was a two per cent cut in funding for the sector, something likely to worry prospective

investors. “So far there is no evidence to suggest that private education is high on Modi’s agenda,” says Khemka. “There have been no reforms suggested that would ease the ability for private investors to open or to run colleges or to clarify the rules around the management companies. In fact it’s unclear that education in the near-term is a priority because the allocation to education was actually cut as opposed to maintained or increased.”

On top of this, Smita Irani, the new minister for human resource development (education is one of her briefs), is also relatively young and not a political heavyweight – further evidence that the government’s priorities lay elsewhere.

Nagarajan is optimistic though, arguing that opportunities for the private sector are already improving. He points

to the 2010 Right to Education Act in the state of Gujarat, which recognises for-profit providers in a way unseen in most other states. “Even before Modi things seemed to be moving in that direction, as seen with the Companies Act where there’s now a lot of push towards corporate social responsibility and giving. And there seems to be a lot of talk about that moving very much into the education space, so I think it’s a good time.”

In any case, with the International Finance Corporation recently investing £81 million in Gaja Capital, an Indian private equity firm focused on the education sector – and with Educomp looking to sell off more of its assets –investment activity is at least likely to hold steady in the coming years if not increase. n

‘The only missing link in India compared to our global portfolio is that we don’t run any chains of schools

Arvind Nagarajan, business development manager, PALF

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