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Introduction
India has emerged as a pivotal hub for global businesses seeking to optimize their operations through Global Captive Centres (GCC). These centres, also known as back office/ in-house centres or captives, have redefined how international corporations conduct their business operations across the globe. This article explores the investment and acquisition journey of foreign companies establishing GCCs in India, highlighting the benefits, challenges, and the transformative impact on the country’s business landscape.
The Rise Of Global Captive Centres
The concept of GCCs gained traction in the early 2000s when global corporations recognized the need to cut down on costs to become sustainable and to boost profitability. In the early days, India gained popularity as a GCC hub due to the substantial cost advantage over Europe and the Americas in terms of setting up GCCs. GCCs perform various functions aimed at saving costs for the group companies such as back-office support services, information technology (IT) and IT enabled services (ITES), research and development, customer support and other related functions. A major factor that has helped India maintain its position as the global hub for GCCs is the large number of cost-efficient, technically skilled and English-speaking pool of resources which directly impacts the utility and the profitability of operations, resulting in an increased demand for GCCs.
Models For Establishment Of Global Captive Centres
Different models have evolved over the years for setting up GCCs in India. The evaluation of an appropriate model depends on multiple factors such as the objective of the GCC, requirements of the relevant industry, type of business unit required, costs, corporate holding and tax considerations, location of the customers and the business model of the entire holding.
In this article, we have discussed two of the most common and favoured models preferred by multinational corporations to set up GCCs in India.
BUILD-OPERATE-TRANSFER (BOT)
Under the BOT model, a third-party provides the service of creating the GCC unit under a BOT agreement signed between the company requiring the GCC (customer) and the third-party service provider. The service provider thereafter builds the GCC either under its existing operations or sets up a new entity under its existing ownership structure and procures the infrastructure, hires the personnel and operationalises the unit for the company requiring the GCC. Once the unit is operational and has the readiness to provide services to the customer at a determined level, the service provider then transfers the unit to the customer who then takes control of the GCC and assumes the ownership of its assets, employees, its rights and obligations.
The transfer of the GCC in such a structure can take place through a number of ways, such as a sale of the corporate entity that owns the unit, an asset sale or a business transfer on a going concern basis from the service provider to the customer.
Tax matters, employment issues, ease of transfer of IP and assets, matters of control and quality, are some of the key factors in deciding the mode of transfer.
Business Transfer-A business transfer on a going concern basis has certain tax benefits and entails the service provider carving out the GCC undertaking/unit from its existing structure and transferring it for a lump sum consideration to the transferee/customer. The transferee/customer then becomes the owner of the undertaking along with its assets and liabilities on a going concern basis. The documentation for this form of transfer requires critical evaluation especially if there are employees that would also be transferred under the arrangement, especially to ensure that the customer is not burdened with liabilities that it has not considered as a part of the deal. Specific documents are drafted with respect to the employees as they are required to give their consent to their transfer and the transferee / customer is required to comply with certain key Indian labour laws, such as providing continuity of service, similar or better terms and conditions of employment and taking over all the liabilities and obligations as an employer of such transferring employees from the start date of their employment.
Asset Transfer– In an asset transfer, the service provider carves out the assets required by the customer for operationalising the GCC unit and transfers these assets to an entity owned by the customer for a consideration that is ascertained based on the commercial understanding between the parties and the value of each asset. This model may provide flexibility to the customer as it is able to cherry-pick the assets required from the service provider and decide the mode of transfer of employees of the unit. The asset transfer agreement and the employee documentation have to be carefully evaluated to ensure that there are no concerns from an employment law perspective or from the customer being hit by unknown liabilities that it had not agreed to take over from the service provider.
Share Sale– In a share transfer transaction, the service provider transfers the special purpose vehicle-company (SPV) that is specifically created under the BOT agreement to house the GCC unit by transferring the shares of the SPV to the customer. This model is usually adopted by customers who have the capacity and financial wherewithal to manage a company, its compliances and operations and have extensive growth plans in India. The consideration in this case depends on several factors in addition to the commercial agreement. In the event the sale of shares is taking place between an Indian service provider and a foreign customer, the parties would have to comply with, inter alia, the Indian foreign exchange laws that also stipulate the pricing guidelines. While this may appear to be a less complicated process of transfer, especially if there are large number of employees and assets, the customer is usually advised to evaluate this model by conducting a due diligence of the SPV to ensure that it is not taking over any unknown liabilities, check for regulatory approvals, the extent of compliances that would have to be completed for such a transfer and evaluate if any change in control restrictions are applicable to the SPV such as in any license, approval, commercial agreement or financial arrangements.
In any GCC transfer, the customer is typically advised to consider all the pros and cons of each mode of set up and transfer and evaluate the requirements with their legal and tax advisors to ensure that there are no complications in setting up a GCC in India.
It is important to note that there may be certain duties applicable on various documents executed between the parties including stamp duties and registration fees. Such costs should be considered in the process of evaluation of the mode of setting up and transfer of the GCC under any model.
CAPTIVE UNIT (SPV STRUCTURE)
In the SPV structure, the service provider sets up an SPV that would house the GCC as a captive unit under the ownership structure of the customer right from the outset. The infrastructure, employees and operations are thus owned by the customer from the start and the service provider assists the customer in operationalising and brining the GCC up to a certain agreed capacity.
Usually, the foreign company requires the assistance of the service provider for a certain time to operate the GCC after the transfer is complete, for effecting the operationalisation and to ensure a smooth transition from the service provider to the customer/ foreign company. Such situations would require additional documentation between the parties for the transition period that may also include usage of certain resources, people, infrastructure, and assets of the service provider. The structure of such transition services agreements is quite standard; however, given the laws in India, especially tax, employment and property laws, the documentation would require careful evaluation from an Indian laws’ perspective.
Outsourcing Agreement
An outsourcing arrangement enables companies to assign their work to a third-party service provider for an agreed fee under a service agreement. The customer does not create a captive service unit /GCC unlike the other models. This arrangement is typically feasible for companies that do not want the burden of maintaining a GCC or are evaluating their operations in India. In this model, while the agreement may have the relevant checks and balances, service levels and quality requirement, the customer will not have control over the group of employees providing the service and the operations of the service provider. This may not be suitable for certain companies, especially if there is a large amount of confidential data being shared or critical IP is being created by the service provider. Several Indian service providers such as Wipro, Infosys and TCS are working with global multinational companies on this model and over the years, this has become a significant business model for large global companies.
Benefits
In addition to access to the vast talent pool, innovative technology, cost-effectiveness and modern infrastructure in India, several subsidies and incentives have been provided under various State and Central laws for setting up GCCs in certain areas, especially for GCCs in the IT sector. These subsidies include waiver of registration fees and other fees payable to the government for land acquisition, capital subsidies, reduced compliance standards and other exemptions. Additionally, many states have dedicated zones for IT and ITES entities and Special Economic Zones (SEZs), which further aid companies in setting up GCCs by providing tax and other governmental incentives.
Conclusion: Empowering Growth and Innovation
Global companies have chosen to take the investment and acquisition journey in establishing Global Captive Centres in India for several years now. By harnessing India’s vast talent pool, innovation and cost-effective operational environment, companies have empowered their global procurement capacities, growth, and innovation.
As the trend to have India as its global hub for research and development continues to evolve, the growth of the GCC model in India stands testament to the symbiotic relationship between international corporations and India’s burgeoning business ecosystem, that cements India’s position as the most attractive destination for setting up of GCCs.
Authors: Shafaq Uraizee Sapre- Managing Partner, Mumbai and Ishaan Wakhloo- Associate, Chandhiok and Mahajan
