One concern common to a large segment of the urban Indian population with children is admission in a “good school". With the increase in urban population, there has been an exponential growth in the demand for educational services, and most cities still lag in supply.

Given the skewed demand-supply ratio in the education sector, one tends to wonder why the private sector has failed to exploit such a promising business opportunity. The answer may lie in the legal regime governing primary and secondary education, or what is commonly referred to as the “K-12" sector.

Illustration: Jayachandran / Mint

Typically, it is state laws that govern school education. These laws deal primarily with procedures for setting up schools, obtaining government recognition and the governance and operation of government-aided schools. Regulations pertaining to unaided private schools are usually sketchy, generally prescribing minimum pay scales for teachers, educational qualifications and the like.

Importantly, there are no uniform guidelines laid down by states on admission procedures, or with respect to the fees that may be charged by private unaided schools. Concerned parents have often protested about the ever increasing costs of education, and disputes over hikes in school fees have reached the courts.

The Supreme Court’s ruling, in the case of Modern School v. Union of India and Others (All India Reporter, 2004, Supreme Court, Page 2,236) is an important ruling regarding the commercialization of education and the question of earning profits from running schools.

Relying on earlier Supreme Court rulings, the apex court held that the determination of the fee structure of unaided educational institutions was part of the right to practise any profession, and that in this respect unaided institutions may exercise autonomy. Institutions are entitled to a reasonable surplus from operations, although the fees charged must be commensurate with the infrastructure provided, and should not result in the “commercialization" of education, or “profiteering". It was also held that the director of education (an office under the Delhi Schools Act, 1973) is authorized to regulate fees and other charges levied by private unaided schools, with a view to preventing the commercialization of education.

Given that schools are generally free to determine their fee structure, what are the hurdles that face the private sector, when it comes to investing in educational infrastructure?

The answer lies in the regulations governing recognition and affiliation of private unaided schools. Schools catering to the middle class are not viable business ventures unless they are affiliated to a state board, the Council for the Indian School Certificate Examinations (schools generally referred to as ICSE schools), or the Central Board of Secondary Education (CBSE). Only students from schools affiliated to these boards are eligible to take exams conducted by these boards. Generally, certificates granted by these boards are considered for college admissions.

In order to apply for affiliation to the ICSE, CBSE or state boards, private unaided schools are required to be owned and operated by either a charitable trust or a society (an entity that is required to have a charitable objective). Often, state laws also require that schools be run by not-for-profit trusts or societies in order to be eligible for recognition and affiliation to the state board, making schools run by companies ineligible to be affiliated with the more popular school boards.

A trust and a society are both entities that are generally used by not-for-profit organizations to operate charitable activities, where any funds generated by such activities are reused for such charitable purpose.

Where a school is run by a charitable trust, the settlers of the trust (that is, the entrepreneur that has settled the trust and set up the school) are typically not entitled to any distribution of profits generated by the school. Similarly, with charitable societies, profits generated by the activities of the society may only be re-employed towards the charitable objective for which the society has been set up, making the sector unattractive to private investors.

Given the current regulatory regime, affiliation to international boards appears to be one popular way around this issue, with the bigger urban centres witnessing a growth in the number of “international schools". Some Indian colleges have started accepting certificates issued by these international schools.

It remains to be seen whether the government will consider amending the regulatory regime to encourage private investment in schools.

This column is contributed by Annapoorna Jayaseelan of AZB & Partners, Advocates & Solicitors.

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