India – Global Capability Centers – Trends, Opportunities And Recent Learnings.

Overview 

With over 1,700 Global Capability Centers (“GCCs”), revenues at $64.6 billion (a 40% jump over FY23 numbers) and a 17% global share of the GCC capacity base, India is the GCC Capital of the World. The GCC market in India is projected to grow to $99-105 billion by 2030 with nearly 2,100-2,200 GCCs and a headcount of ~2.5-2.8 million.[1] 

Early Movers 

As the table below indicates, top Global Banks/ FIG (Financial Institutions Group) entities, and Tech/ Innovation giants have already established GCCs in India: 

Preferred Destinations 

While India hosts 50% of the global GCCs[2], other emerging markets in the region including Malaysia, Vietnam and Philippines are vying for space as alternative destinations for GCC set-up, with multi-lingual and multi-cultural capabilities, significant expertise, and supportive government bodies. However, India remains the preferred destination for the establishment of new GCCs, due to comparatively advantageous competencies in the aforesaid areas, as well as an overall conducive environment, comprising robust physical and digital infrastructure, skilled human capital and supportive government and regulatory policy and legal framework. India is a global leader in producing science, technology, engineering, and math (STEM) graduates[3], with the demand-supply gap in its tech talent being one of the lowest in the world[4], ensuring the availability of a young, diverse, and technically qualified talent pool. These factors give India an edge over its regional competitors and it remains the port of first call for entities looking to set up their GCC operations.   

Within India, cities such as Bengaluru, Hyderabad, Delhi NCR, Mumbai, Pune, and Chennai are the most popular destinations for GCCs in India. There are over 200 GCC units in Tier-II and Tier-III cities as well, including Ahmedabad (Gujarat), Kochi (Kerala), Thiruvananthapuram (Kerala) and Coimbatore (Tamil Nadu). These cities are also shaping up as GCC hubs. 

Several state governments have taken proactive measures to make GCC set up even more lucrative within their jurisdictions, especially to expand and develop the satellite cities beyond the metropolis and state capitals. A notable example is the Karnataka government’s GCC policy for 2024-2029, issued as a draft inviting stakeholder inputs. Under this policy, the government aims to establish 500+ new GCCs in the state by 2030, offering subsidies and incentives by way of contribution to capital expenditure, skilling of talent, and technological, rental, and other assistance, with additional incentives for ‘Beyond Bengaluru’ locations. Each GCC will be assigned a Single Point of Contact (SPOC) and all necessary operational approvals for setting up GCCs will be processed online within 45 days, through a state-of-the-art single window system. Similarly, the government of Tamil Nadu announced a GCC policy offering payroll for jobs in new GCCs set up in the state. 

Quick Fact: GCCs are (typically) offshore centers, located in a geography which offers competitive advantages (including in terms of human capital), supporting a global parent/ multi-jurisdictional group (in case captive) or even to a discrete set of entities operating in the same sector/ industry, leveraging cost efficiencies, diverse talent and technology, which originally were intended to provide basic support operations, but have/ are rapidly evolving into operational centers of excellence and innovation hubs. 

GCC Models 

There are various models that one can consider/ opt for when considering a Greenfield GCC in India: 

• DIY Model: independently establish and operate the GCC (“DIY Model”), retaining complete control and ownership while outsourcing specific tasks requiring specialised local support. 

• BOT Model: a build-operate-transfer model (“BOT Model”), wherein a third-party service provider (“BOT Vendor”) manages the set-up and initial operation of the GCC. Thereafter, the BOT Vendor gradually transfers ownership and control when the GCC becomes self-sustainable and the foreign entity is comfortable in assuming operational and compliance responsibilities/ obligations. 

• Hybrid BOT Models: hybrid models are tailored for specific requirements and resources. Common variants include:  

• Joint Venture (“JV”) Model: where the BOT Vendor retains a minority equity interest in the GCC after transfer to the owner; and 

• Virtual Captive Model: in which the GCC exists solely to provide IT (information technology) and business services to the ultimate owner/ beneficiary, while being managed by a BOT Vendor until the transfer, after which it may expand its service offerings. 

Key Issues and Recent Learnings 

To establish a GCC in India, much coordination among various players, including the owner, the BOT Vendor, if any, legal and/ or tax consultants and local third parties, is required. Some of our recent learnings, basis our experience in this space, include: 

• Setting up an entity in India is highly process oriented and requires an in-depth understanding of the legal nuances and sector specific knowledge. 

• BFSI is one of the most heavily regulated sectors in India. The Reserve Bank of India, the country’s central bank, has recently introduced various regulations, including in respect of outsourcing, data privacy and localisation. Hence, identifying the services to be rendered, regulatory approvals/ licenses/ registrations required and putting in place a legally sound and technologically robust framework, is key. 

• Making submissions in formats expected by the regulators in India, helps expedite the process. 

• Work jointly with foreign counsels and consultancy firms in identifying key risk areas (corporate, foreign exchange and tax laws), both at the foreign country level (which is subject to banking regulations outside) and in India, since the GCC here undertakes non-banking activities, but supports banking and operational activities of the foreign bank and the group companies across the globe. 

Key Growth Drivers 

The growth of GCCs has been fueled by the following key factors: 

• Revenue Driver: GCCs are now being set up as service-based value generators, and are no longer just cost centers. 

• Collaborative Value Addition: Efforts towards collaborations between different partners has fostered innovation and learning. 

• Client Facing: Exponential business development has been achieved through prioritising customer needs. 

• Generative Artificial Intelligence/ Machine Learning (AI/ ML): Development of Artificial Intelligence and leveraging Machine Learning and related technologies have driven innovation. 

• GCC ‘As-a-Service’: Digital transformation via GCC has emerged as a service in its own right. 

• Policy Framework: Collaboration and discourse with industry stakeholders, including the government and regulators, have smoothened operations. 

Global Best Practices 

To achieve continuous improvement, GCC organisations should strategically concentrate on people, processes, technology, data and governance. The key areas and the best practices to ensure continued growth, include: 

• Cyber Resilience and Security: A robust IT infrastructure is required to ensure smooth inflow of data from the parent entity to the GCC and outflow of services from the GCC to the parent entity or other service recipients.  

• The Security Operations Centre (SOC) acts as a centralised unit for monitoring, preventing, investigating, responding to and mitigating the possibility of cyber threats, and the impact/ consequences of any cyber-attacks. 

• Usage of Cloud Computing Services support cyber resilience and ensure data continuity by employing measures like access controls, segmentation, encryption and continuous monitoring for storage, computing and movement of data in cloud environments. 

• Data Privacy, Data Localization and Data Sharing: As sensitive data is being processed and shared between entities, such as user data, employee data, etc., effective safeguard measures are required and mandated by law.  

• The soon-to-be-enforced Indian data law – the Digital Personal Data Protection Act, 2023 (DPDP Act) – provides for processing of personal data of individuals’ resident in India, such as the employees of the GCC or service recipients. Specific, informed, itemised and purpose-driven consent would be required, with the right to be forgotten/ withdrawal of such consent. A consent manager should be appointed for transparency in procedures. 

• Data localisation requirements mandate that data is collected, processed and stored in India. The DPDP Act empowers the government to restrict the transfer of data outside India by notification. The IT (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (“SPDI Rules”) permits sensitive personal data to be transferred outside India only if the transferee country ensures the same level of data protection as the SPDI Rules and such transfer is necessary for performance of a contract or the provider of information has consented to such data transfer. 

• Indian regulators, including the Reserve Bank of India (“RBI”), the Securities and Exchange Board of India (“SEBI”) and the Insurance Regulatory & Development Authority of India (“IRDAI”), have mandated data localization requirements. RBI has instructed that data related to payment systems is stored by operators only in India. SEBI requires that cloud services for data storing are obtained only from service providers empaneled with the Ministry of Electronics and Information Technology (MeitY). Further, IRDAI mandates that original records of policyholders, policies issued and claims made in India are held and maintained in India. 

• Business Continuity Plan (“BCP”) and Disaster Recovery Plans (“DRP”): Planning and preparedness help develop resilience in the operations of the GCC to respond and recover from any disruptions in the market.  

• BCP ensures that critical functions to the GCC, such as financial analysis, IT, research and development, continue uninterrupted. A comprehensive plan, outlining the steps specific to the Indian macroeconomic situation, natural conditions, regulatory and political landscape, would counter the uncertainties.  

• DRP mitigate the consequences of unforeseen or unplanned business interruptions and revenue generation. DRPs with flexible structures operate in a unified and collaborative manner to renew, enhance and invigorate systems while creating a more resilient infrastructure. 

• There must be contingency plans to ensure business continuity. GCCs need to periodically test their BCP and DRP and consider recovery exercises. 

• Corporate Governance: Robust policies and reporting systems must be developed, keeping in mind the international nature of operations, to ensure sound governance of the GCC, as follows:  

• Code of conduct for employees of GCCs would ensure that international standards set by the foreign entity are implemented in the Indian GCC. It would help establish cohesiveness in operations, with best practices followed at the international group level. 

• Whistleblower policies are mandatory, to be established by listed companies in India, but can be implemented generally to ensure that the employees occupying key positions in the GCC do not engage in corrupt practices that could impact the foreign entity and its group. 

• Reporting, inspection and audit structures act as a check and balance to ensure that periodic information is made available to the foreign parent entity. Deviations from the projections can be monitored and necessary actions can be undertaken. Under Indian law, various returns, registers and resolutions also have to be filed with the Registrar of Companies. 

• Clear and precise Standard Operating Procedures (“SOPs”) for operational aspects ensure smooth transitions, standardisation of processes and transparency. Employee committees could be established as the GCC scales up, to review SOPs, flag non-compliance, and take corrective remedies to inculcate a culture of process excellence and perform at a high level of transparency. 

• Innovation, Organisation and Learning: The establishment of a GCC presents challenges that can be proactively addressed through the following:  

• Innovation and fostering transformative development in services, which will enable the company to overcome challenges of rapid development in the industry. It is essential to align the five central aspects of innovation, i.e. corporate strategy alignment, long-term and incremental innovation strategy, self-learning teams, ecosystems and partnerships and instilling a culture of recognition. 

• Focusing on cultivating an open, honest and developmental organisation, with self-development as its core, to help address redundancy in operations. This involves aligning the four levers of learning and development (“L&D”) excellence – business-aligned L&D strategy, fostering learning and skill development behaviors, forming partnerships with academia and industry and driving the industrialisation of L&D impact. 

• Efforts should be directed towards establishing seamless data, information and goal-sharing mechanisms to strengthen the organisation’s impact on global decision-making. It is instrumental to align the drivers of organisational excellence, such as global strategy alignment, value journey planning, innovating for uncertainties, establishing future-ready L&D and empowering local-to-global leadership. 

• GCCs have evolved from being a cost center to a transformative leader, which entails pursuing technical and thought leadership at the GCC level. Technological focus and the technical talent available in India could enable the GCCs to make enormous contributions to the parent entity as centers of excellence.    

• Focus on Talent: The employees of the GCC must be aligned with the international practices followed by the parent entity and efforts should be undertaken to ensure that talent is developed and retained in the organisation.  

• Employing human resources (“HR”) leaders, aligned with the parent company’s culture, eases the integration process and ensures talent acquisition based on cultural fit. Such leaders ensure adoption of global HR policies, such as hiring standards, performance metrics, variable pay and remote work policies. 

• Building a nurturing work culture promotes talent retention, especially in regions with higher attrition rates. Consistent branding and challenging work opportunities must be employed to attract and retain exceptional talent. 

Other Brownfield Considerations   

An entity looking to set up a GCC in India may also consider acquiring the operations of an existing GCC or similar entity providing the requisite services (“Brownfield Entity”). Key aspects to consider are: 

• Approvals: The acquirer would not be required to obtain separate operational licences as the Brownfield Entity is already operating as a going concern. 

• Compliances: The Brownfield Entity is likely to have requisite licenses in place, which would ease the compliance burden on the acquirer. 

• Subsidy: If the Brownfield Entity is set up in a Special Economic Zone (SEZ), receiving tax incentives or benefits from subsidies under government schemes (for instance, state-specific Information Technology/ Information Technology Enabled Services (IT/ ITeS) policies), such benefits would likely flow to the acquirer, subject to the conditions of the schemes.  

• Time and costs: Since the Brownfield Entity is already in existence, the time and cost involved in rolling out the GCC business and processes by the acquirer will be substantially reduced. 

• Business experience: Acquiring an existing Brownfield Entity will help ease the process of carrying on the business because of the entity’s prior experience and market know-how. 

• Diligence: The parent entity would be required to conduct due diligence from a legal, financial and tax perspective, to verify the sanctity of the Brownfield Entity. 

• Alignment of strategy: The business strategy of the Brownfield Entity may not fully align with that of the acquirer, and a transitional phase may be required to ensure its practices are followed. 

• Transfer of personnel: The acquirer would look to ensure smooth transition of personnel, from the individual to organisation level. To this end, structured change management policies should be formulated and implemented so that top talent is able to transition and culturally align with the branding, functioning and policies of the acquirer. 

Legal Advisors 

• Establishing and operating a GCC is a multi-disciplinary exercise. Legal consultants offer quintessential services ranging from pre-incorporation stages to crisis management. 

• Given the interplay of various project work streams, it is imperative to understand and recognise the importance of people management and leveraging subject matter experts. 

[1] Source: Economic Times, April 13, 2024. 

[2] Source: Center for Security and Emerging Technology, November 27, 2023 

[3] Source: NASSCOM, November 23, 2023.