In part II of our series on establishing global capability centres (“GCCs”) in India,[1] we discuss the key issues that foreign companies face when strategising the structure and model for setting-up a GCC.
Introduction
The rapid expansion and growth of GCCs in India have compelled many MNCs to either scale up their existing centres or open one if there is none. It is crucial for a foreign entity (“Foreign Entity”) seeking to set up a GCC in India to conduct a structuring analysis and evaluate its position ahead of making a proposal. Given that it is very difficult (and possibly impractical) to change a GCC structure and model once incorporated and implemented, it is crucial to understand the options along with corresponding ramifications of these decisions upfront.
Choosing between a GCC and a GIC
At the outset, the Foreign Entity will have to determine if it seeks to set up a GCC or a Global In-house Centre (“GIC”). While GCCs and GICs are terms that are at times used interchangeably to refer to the capacity centres of global entities and MNCs, only certain categories of these capacity centres qualify as a ‘GIC’ under the International Financial Services Authority (Global In-House Centres) Regulations, 2020 (“GIC Regulations”). The GIC Regulations define GIC as “a unit set up in the International Financial Services Centre for providing support services, directly or indirectly, to entities within its financial services group, including but not limited to banks and non-banking financial companies, financial intermediaries, investment banks, insurance companies, re-insurance companies, actuaries, brokerage firms, funds, stock exchanges, clearing houses, depositories, and custodians, for carrying out a financial service in respect of a financial product,” which it regulates.[2] However, GIC Regulations are not restricted to governing GIC units in India’s solitary IFSC, which is the Gujarat International Finance Tec-City (“GIFT City”) in Gujarat.[3] Instead, regardless of the corporate structure, any unit that is set up and qualifies as a ‘GIC’ above, will mandatorily comply with the GIC Regulations.
Strategic structuring of a GCC
For a Foreign Entity to set up a GCC in India and also employ individuals for the same, it will first have to establish a ‘place of business’ in India, in the form of a legal entity recognised under Indian laws.[4] For this the Foreign Entity can choose from many different options when structuring its GCC in India, such as a wholly owned subsidiary (“WOS”), a joint venture company (“JV”), a branch office (“BO”), or a limited liability partnership (“LLP”). Each of these entities have their own governing legal/ regulatory landscape in India, and hence would invite individual – approvals, compliances, applicable tax rates, disclosures from the parent Foreign Entity, and most crucially restrictions/ limitations on permissible transferability of funds from the Foreign Entity to and/or from the GCC. Below is a comparison of the regulatory architecture covering these corporate entities:[5]
| Comparative lens | WOS/ JV | LLP | BO |
| Legal and regulatory oversight | Regulated by the Ministry of Corporate Affairs (“MCA”) and the Registrar of Companies (“ROC”) under the Companies Act, 2013 | Regulated by the MCA and the ROC under the Limited Liability Partnership Act, 2008 | Regulated by the Reserve Bank of India, the ROC and the Authorized Dealer Banks (“AD Banks”) under Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 |
| Cost of setting up the entity | Registration and stamp duty payable at applicable rates calculated on the amount of authorized capital of the WOS. Further private companies (WOS/ JV) are exempt from having a minimum paid up capital. | Nominal fees payable to the ROC whilst making the requisite filings. Further there is no minimum paid up capital requirement for incorporation. | Nominal fees to be paid for registration of the branch office with the ROC. Further there is no minimum paid up capital requirement as such, but the BO should have a profitable track record during the immediately preceding 5 years in the home country and net worth of not less than USD 100,000. |
| Number of directors /partner /members | The company should have a minimum of 2 directors (one mandatory Indian resident director)[6] for a private limited company and have 2-200 members excluding employees.[7] | The LLP should have a minimum of 2 designated partners (one mandatory Indian resident designated partner) with no upper limit. | No requirements as to minimum number of directors, members or partners. |
| Requirement for meetings | 4 mandatory board meetings (1 in every 120 days) and 1 mandatory shareholders’ meeting in a financial year. | There are no statutory requirement of statutory meetings or minutes to be maintained. | Not applicable. |
Strategic modelling of a GCC
Even though the decision to choose the most appropriate model is to be made on a case-to-case basis, it is crucial to first understand the several potential structures and models that the Foreign Entity could consider before setting-up its GCC. Prior to setting up a GCC in India, the Foreign Entity would have to determine what services it seeks to outsource, and also demarcate reporting lines, ownership and control. The key models that the Foreign Entity can consider are:
- DIY Model: The Foreign Entity can independently set up and operate the GCC by themselves, or a do-it-yourself model (“DIY Model”) where the Foreign Entity will retain complete control and ownership over the GCC entity and outsource only those tasks/ processes that require specialised local support.
- BOT Model: The Foreign Entity can also opt to outsource the entire process of setting-up its GCC, commonly referred to as the build-operate-transfer model (“BOT Model”). Under this arrangement, a third-party service provider sets up (built) a GCC either wholly or partly, operates it in the initial days, and gradually transfers ownership and control to the Foreign Entity, when the GCC matures into a self-sustainable unit and the Foreign Entity is comfortable in taking over the GCC, along with the compliances requirements of the GCC.
- Hybrid BOT Models: Apart from the DIY and the BOT Models, the Foreign Entity may also adopt variants or hybrids of these two models as per their needs and resources. The BOT Model has two common variants: (i) the joint venture model, in which the entity (or the service provider) building the GCC retains a minority equity interest in the unit even after its “transfer” to the Foreign Entity; and (ii) the virtual captive model, in which the GCC has only a “virtual” presence, i.e. to solely provide IT and business services to the Foreign Entity while being managed by a third-party service provider until the “transfer”, post which it will likely expand its service offerings.
Conclusion
Foreign Entities eyeing India to set up a GCC on account of availability of relatively inexpensive and skilled talent must also take into account the dynamic regulatory landscape governing the same. These regulations can play a significant role in determining the ultimate success of the Foreign Entity’s businesses (through the contribution by its GCC).
For further information, please contact:
Bharath Reddy, Partner, Cyril Amarchand Mangaldas
bharath.reddy@cyrilshroff.com
[1] You can read our introductory post here – Global Capacity Centres (GCCs) take centre stage in fuelling global growth | India Corporate Law (cyrilamarchandblogs.com)
[2] Regulation 2(1)(e), GIC Regulations.
[3] It is pertinent to note that GIFT City is also a special economic zone (“SEZs”) under the Special Economic Zones Act, 2005.
[4] Regulation 3 of the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 stipulates that “no person resident outside India shall without prior approval of the Reserve Bank open in India a branch office or a liaison office or a project office or any other place of business by whatever name called except as laid down in these Regulations”.
[5] Please note that this table is only an indicative list and does not exhaustively cover all the differences between a company/ LLP/ BO.
[6] Please note that if a non-resident director is appointed from a land bordering country necessary security clearance will be required from the Ministry of Home Affairs, Government of India.
[7] Please note that if any investment (direct or indirect) is received from individuals or entities that are from a land bordering country necessary approval will be required from the Ministry of Home Affairs, Government of India.
