Emergence and Transformative Evolution of GCCs in India
Global Capacity Centres (“GCCs”) started as offshore global in-house centres (“GICs”) in the Indian banking industry to help cut costs and provide operational support to the service offerings of a foreign entity (“Foreign Entity”). India has gained credence as a favourable destination because of its skilled human resources (wide talent pool) and competent operational costs. As of FY 2022–23, India’s approximately 1,580 GCCs have 1.66 million employees,[1] and this number is rapidly increasing.
The GCCs in India have gradually evolved from being back offices and cost-arbitrage centres to centres of excellence and growth, becoming the emerging and potential alternative technological and development headquarters. The Indian GCC ecosystem has become a sandbox for Foreign Entities to drive, develop, test and explore new organisation-wide transformation initiatives.
Key Legal and Regulatory Considerations for Establishing or Operating a GCC in India
A Foreign Entity looking to set up a GCC in India would need to comply with various central level and state level local laws. This includes compliance with corporate laws on the type of legal entity to be set up for incorporating the GCC and contract laws for governing the GCC’s contractual relationships (including intergroup agreements, vendor/supplier contracts), corporate structuring, regulatory interventions, dispute mitigation strategies, etc. This clubbed with the fact that the legal position on certain issues like permanent establishment, reporting structuring, data privacy, non-compete and minimum remuneration may differ across jurisdictions, would throw open GCC to some legal risks.
Following are some key legal perspectives to consider when setting up and operating a GCC in India:
Perspective 1: Corporate Structuring – How to Set Up and Commercial Law
The Foreign Entity would first have to choose the type of legal entity to incorporate the GCC in India. It could be a company, joint-venture company, an office, a partnership, or a limited liability partnership. Next, it would have to choose the GCC’s corporate structure. This could range between two extremes vis-à-vis the control and ownership the Foreign Entity exercises over the GCC in India: (1) Opt for the traditional or do-it-yourself model (“DIY Model”), i.e., the Foreign Entity sets up the GCC and retains complete control and ownership (and outsources specialised tasks requiring local support/advisory. (2) Adopt the build-operate-transfer model (“BOT Model”), i.e, a third-party service provider either wholly or partly sets up (build) the GCC/GIC, operates the centre, and gradually transfers ownership and control to the Foreign Entity.
Pre and post setup compliance requirements differ depending on how the GCC’s has been organised in India. For instance, if incorporated as a company under the Companies Act, 2013, and within its rules, the GCC would also need to comply with various requirements including board structures and composition, determining reporting lines, directors’ fiduciary duties, review and preparation of charter documents and company policies, routine and event based reporting/filings, etc.
Perspective 2: Determining Strategic Locations – Where to Set Up
No specialised overarching legislation or regulation to govern GCCs at large exists, but two (2) instruments control GCCs and GICs set up in regulated territories – the special economic zones (“SEZs”) and International Financial Services Centres (“IFSCs”). The Special Economic Zones Act, 2005 (“SEZ Act”), regulates GCCs and GICs set up in SEZs. The International Financial Services Authority (Global In-House Centres) Regulations, 2020 (“GIC Regulations”), notified on November 12, 2020, governs any ‘GIC’[2] set-up in International Financial Services Centres (“IFSCs”). SEZs and IFSCs offer regulatory exemptions to entities operating in their territories to maximise “ease of doing business,” including fiscal benefits (tax and labour law relaxations, etc.) and non-fiscal benefits (simplified licensing/approval process, etc.).
The destinations of choice include Bengaluru, Gurugram, Hyderabad, Mumbai, Delhi-NCR, and GIFT City – all known for their surplus availability of resources and access to a diversified and cost-effective talent pool. Setting up centres in SEZs located within these territories could also help avail of regulatory relaxations. Some states offer benefits/regulatory relaxations beyond those under the SEZ Act, so it also helps to know how setting up GCCs there may affect the operations.
Perspective 3: Employment and Resourcing
Indian employment and/or labour laws would govern individuals (irrespective of their citizenship) recruited/hired to work with the GCC, as the centre would be operating in India. Considering accessibility of diversified “human capital” is one of the key reasons Foreign Entities establish GCCs in India, the centre would have to ensure proactive compliance, including but not limited to establishing necessary policies and systems to prevent and redress employee-related grievances at the workplace. The GCC can employ Indian citizens and foreign nationals, but it should carefully navigate the additional compliances related to recruiting foreign nationals. The increased and massive recruitment drives currently underway imply a desire to recruit from the Indian work force.[3]
Perspective 4: Intellectual property, Data, and Technology
The GCC would invariably provide some services for its Foreign Entity that would be aboard. Hence, it is critical to process the transfer, use, and control of IP and data that it has created or shares with the GCC in India in accordance with the IP, data, and technology laws of India and the host jurisdictions. This includes designing and reviewing intra group arrangements for technology, data and IP, licensing arrangements, and on acquisition of title to, and protection of IP belonging to the Foreign Entity (to the extent it is used in India) and the GCC. From a data and privacy perspective, following the newly enacted Digital Personal Data Protection Act, 2023 (but yet to be made effective), it is crucial to ensure compliance on cross-border data transfers, and adopting necessary policies for the data generated/stored/transferred in India. Besides complying with Indian laws, the GCC needs to comply with the laws of the originating country and India with regard to the use, storage, and processing of any data that originates outside India and is subject to the originating country’s data privacy regulations/laws.
Perspective 5: Taxation
Because of India’s robust taxation regime and the GCC’s global-servicing model, it is important to seek ongoing advice on transfer pricing, GST-related matters, and taxation (including employee incentives, property, etc.) to evaluate different corporate proposals. The Foreign Entity should also take precautions to prevent any risks from being classified as a “permanent establishment” considering the Indian tax department would review/assess the GCC in terms of its control, supervision, and management by the Foreign Entity, specifically on how employees in India report to the employee at the Foreign entity (straight line versus dotted line reporting).
Perspective 6: Bracing for Impact – Preparing for Incoming Regulatory Overhaul
A vast array of regulations and legislations affect the operation of GCCs in India. Current and future GCCs need to be aware of and prepare for consequences emerging from India’s dynamic regulatory landscape. Some key changes planned for 2024 include the enactment of the Digital India Bill, Telecommunications Bill, and the four labour codes (the Code on Wages, 2019; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health & Working Conditions Code, 2020). The Development of Enterprises and Service Hubs (DESH) Bill, 2022 (“DESH Bill”), set to replace the existing SEZ Act, could potentially affect GCCs and GICs in SEZs in the event of significant changes in the regulatory thresholds.
Conclusion
India’s accessible and affordable human capital has helped earn its place as a “destination of choice” for Foreign Entities planning to establish GCCs, which rely heavily on human resources for success. Besides, the lack of availability and/or accessibility to top-tier and diversified talent pools outside India only augments the country’s position as GCC-friendly. Drawing from the successes of the GCCs and their massive impact on the Indian economy, the Government of India has increasingly focussed on driving reforms to facilitate “ease of doing business” to encourage Foreign Entities to directly/indirectly expand their business operations in the country. GCCs have been in India for more than a decade and are a tried-and-tested model in India’s regulatory, commercial, and political environments. This should be encouraging enough for Foreign Entities desirous of setting up GCCs in India.
For further information, please contact:
Bharath Reddy Partner, Cyril Amarchand Mangaldas
bharath.reddy@cyrilshroff.com
[1] ‘GCC 4.0 | India Redefining the Globalization Blueprint’, NASSCOM-Zinnov, (June, 2023) Accessible here – GCC 4.0 | INDIA REDEFINING THE GLOBALIZATION BLUEPRINT | nasscom
[2] Regulation 2(1)(e) of the GIC Regulations defines a 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”.
[3] GCCs on hiring spree: The reasons and the road ahead – The Economic Times (indiatimes.com) and Deloitte plans to hire 50,000 people in next 5 years, says CEO Romal Shetty, Business Today, (December 8, 2023), Exclusive: Deloitte plans to hire 50,000 people in next 5 years, says CEO Romel Shetty – BusinessToday; and India’s global capability centres thrive amid IT slowdown: From support to innovation, hiring surges, Business Today, (February 4, 2024), India’s global capability centres thrive amid IT slowdown: From support to innovation, hiring surges – BusinessToday – Issue Date: Feb 04, 2024
